For the latest issue of Vanity Fair, reporter Bethany McLean got personal with one of our favorite hedge fund couples, Phil and Lisa Maria Falcone. If you’ve been keeping up with the travails of the Harbinger Capital founder and his wife, you know that despite living in a 25,725-square foot mansion on 5th Avenue (which was renovated to include a bar inside Lisa’s closet), a few billion or so in the bank, unparalleled eyes for fashion and Manhattan’s premier singing and dancing pig who can also play the piano, the last couple years have not been the easiest for the Falcones. Everywhere they turn they feel like people are beating up on them, taking shots. To their chagrin and bewilderment, New York “society,” for the most part, doesn’t accept Lisa and many of Phil’s investors, when they’re not being held by a gate, have run for the hills, causing Harbinger’s assets under management to drop from a peak of $26 billion to $7 billion and counting. Things have gotten so bad, in fact that, several months back, Falcone “almost took off the Ganesh charm- the elephant-headed Hindu deity that represents good fortune- that he wears around his neck.” As he told McLean, “I thought, You have got to be kidding. I get very superstitious.”
But he kept it on and why? Because 1) You have not seen the best of Phil Falcone yet:
“You take your lumps and get your bruises. you get knocked down. The key is getting back up,” Falcone says. “I’m already standing. I’m 48. It’s not even the second period of my career, and I’ve had a pretty good first period.”
And 2) Phil’s got a big bet in the works, one that he’s pretty sure will shut everyone up, about everything, if the elephant can pull through for him. You know the one. LIGHTSQUARED. Yeah. Just let it sizzle there, in the air. It’s going to be huge and then all you people are going to be begging to invest with the best.
“I think [the wireless bet] could be bigger than subprime for me,” he says.
You know what else it will rival? Hairbrushes.
In 1991, Falcone and a friend from Harvard pooled their cash and pledged everything they had-including personally guaranteeing bank loans- to buy a New Jersey-based hairbrush manufacturer. “I thought, I can do that,” Falcone says about running a business. The first blow came when he found out that the inventory had been badly miscounted; the final one came when their largest customer declared bankruptcy. “I was 27 and one lender started asking about my personal collateral. [He asked,] ‘Do you have any artwork?’” recalls Falcone. “I said, ‘have a Bobby Orr poster in my bedroom!’” Falcone says he bank accounts were frozen and his electricity shut off. “I realized I had to start all over, and that was fine,” he says. He didn’t cut his last check to creditors until 1997.
Anyway, wireless. Before we can get there, we have to go back and clear a few things up. Like that business with the loan Phil made to himself from the gated fund in order to pay his taxes. What was that about?
Falcone does have an explanation: an unexpected tax bill. Managers who keep their own money in their fund, as Falcone does, frequently take a distribution to pay their taxes, which are often considerable. Another way for managers to raise cash is to get a loan (against their assets) from a bank. Falcone says he didn’t take enough or a distribution, because the amount he owed for 2008 had been calculated incorrectly by his advisers, and by late 2009, when he found out, no banks were lending sizable sums to hedge-fund managers. The IRS doesn’t take “I don’t have the cash” as an answer. “It was a perfect storm o epic proportions,” he says. He went to a top law firm, which advised him that a Harbinger fund could make a loan to him on terms that were favorable to the fund’s investors. And so, he borrowed the $113 million to pay his taxes. Falcone points out that the loan was more than fully backed by his own money in the fund, which was in turn pledged to investors. “I have always kept the bulk of my money, and I mean the bulk of my money, in the fund. How can anyone possibly say my interests aren’t aligned with theirs?” he asks.
And that Times stake:
By late 2009, Falcone was selling his shares- most at less than half the price he had originally paid. “If I could do it all over again, I probably wouldn’t do it,” he says today of his investment in the Times. “I’m not afraid to admit when I make a mistake, and that was not one of my best trades.”
What the short-selling ban meant for him:
There were more curveballs, including what Falcone calls “the worst day of my life.” Heading into the disastrous fall of 2008, he had a huge short position- one of the largest short positions anyone on the Street can remember- in Wachovia, the large bank that had accumulated a massive book of subprime mortgages. He was right- in theory. But when the UK and then the US temporarily banned short-selling certain financial stocks, Wachovia shot up from $9 to $18. He had to cover part of his position and says that he lost $1 billion- in just one day.
How investors fucked him for being great:
What he didn’t foresee was investors’ pulling their money from his fund: “We were victims of our own success,” he says, meaning that thanks to its great performance Harbinger was a huge part of many investors’ overall portfolios, and they wanted to pare back. And as the world became even scarier, many people simply wanted cash. During the first half of 2008, even as Harbinger was still soaring, Falcone says investors asked for some $7 billion of their money back. By the end of 2008, they’d asked for $9.5 billion to be returned. He was and is still shocked. “I would be hard-pressed to think of another fund that had that level of redemptions- and the bulk of that was before the market fell apart,” he says.
Where the bitches who want to tell Lisa Maria how to act can go:
“I am great at one thing and one thing only. I hate to say it, but that’s being myself,” she says. “I never got criticized in Harlem. Then I came to this side. It’s like, Wow. Why aren’t you embracing me? Is is that Philip and I are the Beverly Hillbilies?…I’m not going to not move my hands when I talk because that not done.”
And perhaps most importantly, how Wilbur, the Falcone’s multi-talented pig became part of the family:
Lisa Maria wanted their twin girls, Carolina and Liliana, now six, to act out EB White’s Charlotte’s Web one Halloween- and they needed a pig to play the part.
Anyway, back to LIGHTSQUARED. It’s happening, it’s going to be huge and when it is, as McLean says, it’ll mean that Falcones will be with us “for a long time.” And you’ll all want a piece of this. Phil. Lisa. Wilbur. Harbinger, which you’ll be begging to get gated by. Just wait.