G4 harbinger from G1
Maria, are renovating a 27-room mansion in New York for which they paid $49 million. The house- hold includes a potbellied pig named Wilbur. Falcone, 48, is the founder of
New York-based Harbinger Capi- tal Partners. In 2008, Harbinger was one of the world’s most suc- cessful 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 cob- bled together from subprime mortgages would collapse. When they did, in 2007, Har-
binger 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 fell50percentfrom 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 per- cent on average in the first eight months of 2010, according to Hedge Fund Research inChicago. 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 pri- vate companies, which have proved hard to sell since the cred- it 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 pow- ered by satellites and cell towers that will cover the entire United States and compete with AT&T, Verizon and billionaire CraigMc- Caw’s Clearwire to deliver fast Internet service to smartphones. Falcone saysHarbinger has spent $2.9 billion on its broadband
EZ EE
KLMNO Hedge fund founder makes biggest bet yet
company — called LightSquared — which in turn plans to pay Nokia Siemens Networks $7 bil- lion to build and operate its net- work over the next eight years. With LightSquared,Harbinger
is betting that the boom in wire- less data triggered by Apple’s iP- hone and Google’s Android oper- ating system for mobile phones will create a shortage of spectrum —the radio frequencies neededto transmit phone calls, Web pages and YouTube videos over the air. TheU.S. government leases rights to those frequencies. Data traffic on AT&T’s network, where the iPhone operates, grew 5,000 per- cent in the three years after that device came out, AT&T says. Unlike AT&T and Verizon, LightSquared won’t run its own wireless service. It will sell space on the network at wholesale pric- es to other carriers, retailers and media companies. If Apple want- ed to sell iPhones that run on an Apple-branded network, for ex- ample, it could contract with LightSquared for the capacity. “I’ve always been a believer in wireless,” Falcone said in his of- fice 30 stories above Park Avenue in New York. He acknowledges that his clients see LightSquared as a giant gamble because it ac- counts for much of Harbinger’s portfolio. “This has been a hot button for some of my investors, the biggest issue formein the last 12 months,” he said. The risk for Falcone is alienat-
ing investors who thought they were putting money into a hedge fund that traded securities that were easy to buy and sell, not one that locks up their money in a private wireless company that could take years to build and years longer to turn a profit. “He’s changed the very focus of
the fund,” says Geoffrey Bobroff, an investment fund consultant. “If you do that, you need to afford people the opportunity to exit.”
Make or break The wireless play could save or
break Falcone and his dwindling fund. Falcone started 2009 with just $6.5 billion, an investor says, after losses and the return of billions of dollars to anxious cli- ents. Falcone has at least $800 million of his own money in the Capital Partners fund, according to investors.
LightSquared and other tele- communications investments ac- count for about 90 percent of net assets inHarbinger’s CapitalPart- ners fund and more than 50 per- cent of its Special Situations Fund, which together hold about $5.5 billion, according to inves- tors. Falcone declined to confirm the numbers. Harbinger has to move fast.
The FCC is requiring Light- Squared to build out a network that can serve 100 million people by Dec. 31, 2012. If it doesn’t, the FCC can nullify LightSquared’s licenses for the radio frequencies it needs to operate. Building such a network will cost about $5 billion, says Credit Suisse Group telecom analyst Jonathan Chap- lin. Falcone will have to cover $3 billion more in losses while he hustles for customers, Chaplin says. “It’s going to take a lot of capital to get it built, and I’mnot sure the capital is available,” he says. Falcone secured a piece ofwhat LightSquared needs in Septem- ber, getting a $750 million, four- year loan from UBS, according to sources. Oneoption forFalcone is to sell
his licenses now and forget the fuss of building a network, Chap- lin says.Harbinger got the licens- es inMarch when it completed its purchase of a money-losing, Res- ton-based satellite company calledSkyTerraCommunications. Those licenses are probably
worth $9 billion today, Chaplin said. They cost Falcone about $4 billion, including leases on wire- less frequencies he signed to com- plement SkyTerra’s, Chaplin says. Any transaction would need FCC approval. Investors will have to wait lon-
ger, perhaps for an initial public offering, if Falcone keeps build- ing. McCaw’s Clearwire, which sold shares to the public in April 2007, has a market value of $7.3 billion. Whether he builds a telecom
system or sells his spectrum, with the Capital Partners fund strug- gling, Falcone needs a winner. As of the end of August, Capital
Partnershadlost 16 percent, part- ly because of a plunge in the stock of TerreStar, another Reston- based satellite firm in which it owns a 31 percent stake. TerreStar’s shares are down more than 80 percent this year,
SUNDAY, OCTOBER 24, 2010
KEVIN WOLF/ASSOCIATED PRESS Philip Falcone ofHarbinger Capital Partners is investing in wireless.
and on Tuesday, it announced that its TerreStar Networks sub- sidiary had filed for Chapter 11 bankruptcy protection to reduce the amount of debt on its books. Some investors say they have
lost patience. Falcone is liquidat- ing about 80 percent of his $2 billion Special Situations Fund, which holds a chunk of the Light- Squared investment, at the re- quest of clients, investors say. Falcone has been trying since June to raise $1 billion to $1.5 billion for LightSquared from in- vestors who would be willing to commit capital for several years, according to potential investors. That money would be used to
buy some of the wireless bet from his two hedge funds. As of mid- September, he had no takers.
Buying SkyTerra Falcone’s satellite play started
out as the kind of distressed-debt investment typical of Harbinger. The licenses he’s using to build his network have been bouncing from one owner to the next since 2000, when Motient, a company that sold package-tracking servic- es toUnited Parcel Service, set up a partnership with other inves- tors called Mobile Satellite Ven- tures to try to build a network. It sold part of its stake in the unit in October 2001 and then sought bankruptcy protection. Apollo Global Management,
the private-equity firm run by Leon Black, bought a piece of an Internet softwarecompany called RareMedium Group in 1999. Two
years later, Rare Medium bought into MSV. As the Internet boom went bust, Rare Medium mor- phed into a satellite communica- tions company, changing its name to SkyTerra Communica- tions in 2003 and going on to accumulate a majority of MSV in May 2006. Falcone started acquiring Sky-
Terra shares about the same time, according to filings. He has been on a telecom bender ever since. He says buying wireless spectrum is a better bet than buying media properties. “Do you want to own the Lin-
coln Tunnel or the cars that go through it?” he says. “You want to own the road.” In April 2008, Falcone paid
Apollo $10 apiece for 16.4 million shares of SkyTerra. By the end of 2008, the shares had dropped 86 percent, to $1.79. Harbinger bought the shares of SkyTerra it didn’t already own in March of this year for $262.5 million and renamed the company Light- Squared in July. In addition to LightSquared
and his stake in cash-strapped TerreStar, Falcone bought a 28 percent stake in Inmarsat, a Lon- don-based competitor to SkyTer- ra that has 11 satellites providing worldwide voice and data service. Inmarsat controls wireless
spectrum that’s interwoven with LightSquared’s. Having broader swaths of spectrum means you can send more information over the air. If LightSquared is to use its spectrum for broadband Inter- net, it must be separated into contiguous blocks, says Patrick Comack, an analyst.
Dirty spectrum
“They’ve got a huge amount of high-quality spectrum, but the
MICHELLE SINGLETARY
Once your resume is ready, better check your credit report
color from G1
human-resource professional and lawyer, told the EEOC. Although some employers
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might reviewcredit histories thoughtfully, others might auto- matically screen out all appli- cants with a weak credit record, testified Chi ChiWu, a staff attor- ney at theNational Consumer LawCenter. Wu fears that job candidates, especially minority applicants who are often the victims of predatory credit practices, will not be fairly judged based on their ability to perform a job and will be shut out of employment because of their credit histories. She’s not alone in her concern. Eighteen states and the District of Columbia have recently con- sidered legislation to restrict the use of credit reports in hiring, ac- cording to the lawcenter. Oregon and Illinois recently enacted laws restricting the practice. Wu told the EEOC that it
should prohibit or, at the very least, greatly restrict the use of credit reports in the hiring pro- cess. “A simple reason to oppose the
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use of credit history for job appli- cations is the sheer, profound ab- surdity of the practice,” she said. “Using credit history creates a grotesque conundrum. Simply put, a worker who loses her job is likely to fall behind on paying her bills due to lack of income. With the increasing use of credit reports, this worker now finds herself shut out of the job market because she’s behind on her bills.” Here’s the underlying question
that so far has no definitive an- swer: Do workers with money troubles have a propensity to steal from their employers? I couldn’t find any indepen-
dent research that says, yes, if a person has lousy credit, he or she is more likely to embezzle money or accept bribes. “Although there is consider-
able research that supports the use of credit scores in making
consumer decisions, there is lit- tle research exploring the impli- cations of using credit checks in employment decisions,” saidMi- chael Aamodt, principal consul- tant with the DCI Consulting Group, where he conducts salary equity analyses. We’ve come to accept that our
credit history will be pulled and checked if we want to borrow money. That’s fair enough. We’ve begrudgingly accepted
that insurers set car or home in- surance premiums in part based on how customers handle their credit. Certainly there are some jobs
where it does matter how an em- ployee or applicant handles money. Some employers are re- quired to pull a credit report if an employee is going to handle cash or work in a financial-ser- vices position. At least that makes sense. If you’ve got some major personal cash-flow issues, the temptation could be too great.Nonetheless, this trend of employers digging into people’s personal finances is something we should be challenging and re- stricting. I’ve worked with quite a num-
ber of unemployed individuals whose credit has taken a beating as a result of their loss of income. And now on top of worrying about finding a job, they have to preemptively tell a prospective employer about their financial difficulties. Even if they’ve been reckless with their own funds, it’s not something job candidates should normally have to disclose or discuss. It’s really none of the employer’s business.
Readers can write to Michelle Singletary c/o TheWashington Post, 1150 15th St., N.W.,Washington, D.C. 20071. Her e-mail address is
singletarym@washpost.com. Comments and questions are welcome, but because of the volume of mail, personal responses may not be possible. Please also note comments or questions may be used in a future column, with the writer’s name, unless a specific request to do otherwise is indicated.
majority isn’t usable until they clean it up,” Comack said. To solve that problem, Light-
Squared said that it would pay Inmarsat $337.5 million over 18 months to modify its network so that the frequencies can be un- tangled. The FCC originally set aside
the SkyTerra spectrum strictly for satellite use. The FCC encourages satellite systems because they aren’t affected by hurricanes, earthquakes or other events that can knock out cell towers. The downside is that they don’t pro- vide good connections in cities, where buildings can block trans- missions, and that all of the ex- pense is upfront: SkyTerra’s two satellites will cost $300 million each to build and launch, Credit Suisse analyst Chaplin says. The SkyTerra spectrum be-
came more valuable inNovember 2004, when the FCC ruled that its satellite system could be aug- mented with land-based cell tow- ers, making it more attractive to mobile phone users. Falcone still must launch satel-
lites to comply with the FCC licenses. Lots of companies have tried to build satellite networks and failed. One of the first, Tele- desic, planned to dish up Internet service from space with 288 inex- pensive satellites by 2002. It was backed by McCaw, Mi-
crosoft co-founder Bill Gates and, later, Saudi Arabian Prince Alwa- leed Bin Talal. The backers halted funding, and the network was never built. Falcone knows the risks. Yet he
takes pride in never losing his calm. “You tell me I need a heart
transplant,” he says, “and then I’ll get stressed out.”
—Bloomberg News
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