LightSquared and many affiliates, as widely expected, filed for protection from creditors with the U.S. bankruptcy court in Manhattan. Falcone, once one of the hedge fund industry's most powerful figures, and LightSquared's creditors failed to reach an agreement.

Still Falcone, who dramatically overhauled his portfolio in the last two years by putting nearly all assets into LightSquared, is not giving up on his dream of building a network to compete with AT&T, Verizon and others. He put a positive spin on the bankruptcy filing by saying it would give the company much needed breathing room and protect it from creditors who he said are looking for a quick profit.

The future of LightSquared, 96 percent-owned by Falcone's Harbinger Capital Partners, has been in doubt since February when the U.S. government effectively told the company to stop building its network.

Falcone's dream rested largely on the U.S. government's permission for LightSquared to build out the wireless network. When tests showed that LightSquared's network would interfere with global positioning systems used by the military and various industries, the U.S. Federal Communications Commission said it would revoke permission to build out a new high-speed wireless network.

ROOM TO BREATHE

"The filing is intended by LightSquared to give it the additional runway it needs to resolve regulatory issues so it can build the nation's first integrated satellite-terrestrial 4G wireless network," Falcone wrote to investors in a letter seen by Reuters. He did not mention the enormous losses his portfolio sustained because of this bet.

In the first two months of 2012 Harbinger Capital Partners lost 26.7 percent after having dropped 47 percent last year, largely due to LightSquared writedowns.

One of the issues that creditors and Falcone haggled over was what role he would have in the future, people familiar with the matter said.

Creditors no longer wanted Falcone to be the public face of LightSquared and they wanted to cut Harbinger's ownership stake to 50 percent with bondholders getting the other half, people familiar with the matter said.

At the same time LightSquared firmly blamed the everyone on the other side including the GPS industry and the main lenders for its current troubles.

Marc Montagner, LightSquared's chief financial officer, said in a filing that the GPS industry, which balked when tests showed the interference, "refused to compromise" and "sought to convince regulatory agencies to strip LightSquared of its ability to use its allocated spectrum for terrestrial purposes."

THE GROUP

Meanwhile the biggest lenders, including hedge fund titan David Tepper's Appaloosa Management, Capital Research and Management Company, Fortress Investment Group, Knighthead Capital Management and Redwood Capital Management, were seen by industry analysts as having been especially flexible. They had extended their deadline twice already even after LightSquared had violated the terms of its debt. Activist investor Carl Icahn had been part of the group until he sold out, likely making a tidy profit.

But by Monday it was clear that no last minute deal could be worked out even after lengthy meetings.

In its filing with the court, Reston, Virginia-based LightSquared said it has more than $1 billion of both assets and liabilities, according to the bankruptcy petition.

Financial statements for LightSquared reviewed by Reuters show that LightSquared has about $2 billion in outstanding debt.

According to the filing, some of LightSquared's creditors include Boeing, which is owed $7.5 million, and Alcatel-Lucent, which is owed $7.4 million.

Milbank, Tweed, Hadley & McCloy is serving as general bankruptcy counsel to the company.

FALCONE'S HOPES AND DREAMS

For Falcone, who sank billions of dollars of his investors' and his own money into LightSquared, the bankruptcy likely spells the end of the trader's career as a professional investor, industry analysts said on Monday.

"It moves him one step closer to having lost everything he's invested in it," he said. "For him to get anything back he'll have to come up with some deal that would deliver well in excess of $2 billion of value for this asset," said Tim Farrar, an independent industry analyst who has followed the situation closely. "Without a spectrum swap or a strategic partner it's very unlikely," he said.

Only five years ago, Falcone had been crowned as one of the hedge fund industry's biggest stars thanks to a savvy bet against the overheated housing market that helped increase his Harbinger Capital Partners to about $26 billion in assets under management. By earlier this year that had shrunk to roughly $4 billion.

When Falcone was hot, hundreds of endowments and funds of funds plus wealthy individual investors flocked to his New York-based hedge fund in hopes he would soon repeat the triple-digit gains of 2007.

Now Falcone, a former Harvard College hockey star, is being sued by at least one individual investor and other institutional investors who have not been able to get their money out as he locked down the portfolio to conserve cash. They acknowledge they are embarrassed to be ensnared in what could become the year's biggest hedge fund collapse.

(Additional reporting by Jonathan Stempel in New York; Editing by Matthew Goldstein, Gerald E. McCormick and Phil Berlowitz)

• A Permanent Economic Emergency