Philip Falcone bet against the housing industry last year, and it paid off to the tune of $1.5 billion. Now he has a stake in the Minnesota Wild.
At Valentini's Supper Club, a half-dozen longtime residents reflect on their native son. Philip Falcone was a hockey standout, dubbed "the phantom" for his uncanny ability to cruise -- untouched -- legs barely pumping, past defenders.
He was the youngest of nine, who grew up in his brothers' hand-me-downs; the quiet, inquisitive kid with a sheepish grin who worried about his grades or making the hockey team, even after it was clear that he was one of the best players in the state. He was the one most deeply affected when the father he worshiped walked out on his family, leaving his mother to raise them on an 80-cent-an-hour job at the local shirt factory.
When word creeped out this spring that Falcone, now a New York hedge fund manager, made more than $1.5 billion by gambling against the housing market, and recently used part of his wealth to buy a minority stake in the Minnesota Wild, many in this Iron Range town of 5,000 could scarcely believe it.
Even his 86-year-old mother, Caroline, who feeds him rigatoni and meatballs when he comes home and keeps his phone number taped to a lamp next to her living-room chair, said she never imagined that Philip would be so successful.
For Bob Shock, 71, assistant hockey coach for 23 years at Chisholm High School, the image of Falcone the hedge fund titan failed to register as vividly as his memory of a boy who skated past dusk and wore hockey socks around his throat to keep warm.
"He may be a big shot in New York, but he'll always be a little Iron Ranger to us," Shock said.
The two sides of Falcone -- Iron Ranger and hedge fund manager -- collide in the midtown Manhattan offices of Harbinger Capital Partners.
The digs are quiet and spartan, with a threadbare blue carpet and a long table of traders and research analysts -- 18 in all -- hunched over computers.
Falcone, 45, spends the first several minutes of a three-hour interview staring into the distance and running his hands through his shoulder-length hockey hair. He looks as if he'd rather be anywhere else. "I'm not much of a talker," he confesses.
He doesn't need to be. With $26 billion under his management, he is loudly heard. Known on Wall Street as a "vulture investor," he buys large stakes in troubled or bankrupt companies and then agitates for change -- often using the courts when managers fight his wishes.
Falcone might have remained just another anonymous fund manager were it not for a spectacularly successful bet against the housing market. In 2006, he and a handful of other fund managers began buying hundreds of millions of dollars of credit default swaps, contracts that are supposed to insure bondholders against loss. The riskier the underlying mortgages became, the more the swaps were worth. Bearish investors like Falcone bought swaps early, betting that the housing market would crumble.
As mortgage delinquencies spiked, the value of credit-default swaps soared. "It was a gutsy bet, because so few of us were doing it," said Whitney Tilson, founder of New York hedge fund T2 Partners.
By year's end, Falcone personally had reaped more than $1.5 billion, considered one of the largest one-year paydays in Wall Street history. In 2007, Falcone's hedge fund posted a net gain of 114 percent. His face appeared on the cover of Business Week. His $49 million purchase of a 27-room mansion from former Penthouse publisher Bob Guccione -- it features an indoor pool, solarium, and theater -- became fodder for New York tabloids.
He also bought into the career he could no longer have, snapping up a minority stake in the Minnesota Wild. In April, Craig Leipold paid $260 million for 51 percent of the NHL franchise, and Falcone, who keeps a collection of old Minnesota North Stars trading cards in a glass case on his desk, invested an unidentified sum for a 35 percent stake. "I figured if I can't play in the NHL, I might as well buy a team," he said.
Despite speculation that Falcone will step in as the Wild's managing partner when Leipold, who is 56, has had enough, Falcone says he'll remain a passive investor.
"Listen, Craig is running the team, which I'm fine with," Falcone says. "I don't have the time to do that right now, and I don't think you can do it halfway."
A childhood on ice
Growing up in Chisholm, Falcone found refuge on the ice, and ultimately the ticket to a life he never imagined.
When Philip was 9, his father left his job as a supervisor in Chisholm's water department and moved to Iowa. Refusing to uproot the family, Caroline got a job sewing ladies jackets at a local factory.
Falcone said he worked through the pain of his father's departure the only way he knew how -- immersing himself in sports and school. He spent long hours skating back and forth on the ice across from his house, shooting the puck into an empty net and making pretend crowd noises to himself.
"I became more of an introvert," Falcone said. "And maybe there was some anger and maybe that added to my drive. There's no question that I stepped up my intensity in the classroom and on the ice."
Mark Baron, of Hermantown, one of Falcone's closest friends then and now, said they would secretly tape open the bolts of Chisholm's indoor ice arena so they could skate after hours. "I'm not exaggerating when I say there was nothing else but hockey for us," Baron said.
The hard work paid off when, in 1979, the Chisholm High School hockey team went on a 12-game winning streak, and beat mighty Grand Rapids -- a perennial hockey powerhouse -- in overtime, with Falcone scoring two goals. So many people crammed into the arena for the game that the "fire marshal just walked away, shaking his head," said former coach Herb Sellars.
In Chisholm, basketball had always been king. But for a brief while -- they lost in the first round of the playoffs -- Falcone and his teammates were hometown heroes. College recruiters came knocking, including Harvard University, which persuaded Falcone to come out East.
Falcone remembers his physics teacher asking, "' Why are they gonna take you?' I was like, 'Why wouldn't they?' It's times like that, and comments like that, that have always fueled my drive."
A long way from home
At Harvard, Falcone played center on the varsity hockey team and majored in economics. He played professional hockey in Sweden for a year before a thigh injury ended his sports career.
His Wall Street career began at Kidder Peabody in New York, which hired him to trade high-interest junk bonds for just $20,000 a year. At the time, the junk bond market was largely unregulated, and young traders were treated like fraternity pledges. Falcone remembers a veteran Kidder trader ordering one of the new hires to get him a Philly cheese steak sandwich -- from Philadelphia.
Despite his Harvard degree, Falcone was still rough around the edges. He was proud of his first suit, which he'd paid $80 for, until a trader spotted the "American Craftsman" label inside. "He goes, 'Hey, Falcone, where'd you buy this thing, at the local hardware store?'"
But the competitive atmosphere energized him. Within three years, he was making $500,000 and was ready to take a shot at his own leveraged-buyout business.
In 1990, he teamed with a friend from Harvard; they pooled their savings to acquire AAB Manufacturing, a troubled maker of hairbrushes and other consumer products. Falcone became president.
But the venture failed -- miserably. Within six months, AAB had defaulted on its loan covenants; soon after, one of its largest customers filed for bankruptcy. Falcone, who had personally guaranteed the loans, had his bank account frozen and the lights shut off at his apartment.
A bank officer asked if he had any valuable artwork in his rented apartment. "I told him that I had a Bobby Orr poster in my bedroom, and you're welcome to that if you want it," he said. "I had nothing."
Falcone went back to what he knew: investing. Rather than operate companies, he began snapping up troubled assets, shorting distressed bonds and taking large positions in sinking companies.
Some bets were notable. He invested $150 million in Fortescue Metals, an iron ore company in Australia that faced severe losses five years ago. Thanks in part to a worldwide commodities boom, that investment is now worth $4.7 billion. He bought General Chemical, a New Jersey-based soda ash producer, out of bankruptcy and recently sold it for a $500 million profit.
Gobbling up New York Times stock
In January, Falcone and another fund bought a 4.9 percent stake in the public shares of the New York Times, pushing the newspaper to sell off non-core assets and add four directors to its family controlled board. The Times recently agreed to add two of those picks to its 15-person board. Falcone and a Times spokeswoman declined to discuss the investment.
Falcone is also rumored to have bought a 5 percent stake in the Star Tribune's debt, which he also won't discuss.
In recent years, Falcone has shown he's not afraid to sue to get what he wants. In 2006, for instance, he bought a 10 percent stake in then-struggling Openwave Systems Inc., and accused the software company of flouting the will of its shareholders when it blocked two of his nominees to its board. Falcone asked a Delaware court to order a new election, but the judge ruled against him.
At Harbinger, the only other employees with offices are the firm's two attorneys.
"He's become more of an activist investor now," said Brad Alford, founder of Alpha Capital Management in Atlanta. "And with $26 billion, he's got a pretty big stick."
Still, in the world of Wall Street, some believe Falcone got lucky with one big bet on the housing industry. The general view is that one-hit wonders "have a pass to the executive washroom, but it's just a day's pass," said Scott Galloway, founder of hedge fund Firebrand Partners. Galloway, who has invested alongside Falcone, strongly disagrees with that sentiment.
Falcone said the naysayers have overlooked the amount of research that went into his strategy. Nearly a year before he started buying credit-default swaps, Falcone explored at length whether Congress would bail out homeowners; he hired two lobbyists and made several trips to Washington before deciding that a bailout was unlikely.
Falcone noted that his fund is up 35 percent this year, while most broad-based hedge fund indexes are down slightly. His fund is up 575 percent since 2001. "For people to say it was just a fleeting thing, they're dead wrong and I'm going to prove it," he said.
Falcone insists that his newfound millions haven't changed him. He still walks 10 blocks to work each day, and continues to take his 3-year-old twin daughters, Liliana and Carolina, on a date at least one night a week.
So far, he's spent money on matters close to him -- refurbishing the hockey team's locker room at Harvard, helping fund a documentary on Minnesota's pond hockey tournament, donating $50,000 to the Chisholm Community Foundation. He tried to buy his mother a new house, but she refused.
This weekend, at the three-day Falcone annual July 4th gathering on Little Sturgeon Lake, Philip brought the lobster tails.
Last summer, at Chisholm High's all-class reunion, he donated $15,000 to help fund the fireworks show, which according to many longtime residents, was the best the town had ever seen. Later that night, Falcone paid for a night of drinks for everyone at Tom & Jerry's Bar in downtown Chisholm, then tipped six bartenders $250 apiece.
"It's just money," Falcone says. "It's there, but it doesn't define who I am."
Chris Serres • 612-673-4308