Sen. Bill Nelson wants to repeal bankruptcy 'safe harbors' for derivatives

Sen. Bill Nelson (D-Fla.) is looking to repeal the preferential treatment of complicated financial derivatives when they enter bankrutpcy proceedings.

Nelson submitted an amendment and is circulating a letter to senators urging them to support the change as part of Wall Street financial overhaul legislation now under debate.

In the letter, Nelson took aim at the "backdoor bailout" of major financial firms that had derivatives deals with the crippled insurer AIG. Banks, notably Goldman Sachs, received billions of dollars from taxpayers because of the oustanding derivatives contracts with AIG.

"Under current law, credit default swaps and other derivative contracts are entitled to special, preferred treatment in bankruptcy proceedings. Unlike other contracts, a derivative is not automatically terminated when a bankruptcy petition is filed," Nelson said in the letter, dated April 21.

"Unfortunately, pending financial reform proposals would preserve the derivative safe harbor provisions available in bankruptcy law and extend the safe harbors to the new regime for resolving large, failed financial institutions," Nelson said.

Nelson said his amendment would end the safe harbors.