A Federal Reserve staff analysis outlining concerns and advantages to the Treasury’s resolution proposal is circulating among staff members in Congress, according to Congressional sources. FOX Business has obtained the document. The Federal Reserve declined to comment on its authenticity.

This is an analysis of the power the Obama Administration requested days ago. It would allow the government to take over a failing, non-bank, systemically important institution.

Even those who may see their power increased are alerting lawmakers to the potential problems such an authority poses.

The Federal Reserve Board has not reviewed or approved this draft or the policy decisions made in the draft. However, Federal Reserve Chairman Ben Bernanke expressed support for this authority earlier this week.

CONS:

--“No existing government agency has the requisite resources and expertise to step into this role easily.”

--Federal Deposit Insurance Corp. “process has never been tested in the context of the resolution of a very large, complex bank, much less a holding company or other kind of financial firm.”

--“The expectation that the resolution regime for systemically important financial institutions will be used only infrequently.”

--“If and as serious financial stresses developed, there could well be a need for multiple, simultaneous such efforts, which would likely tax whatever capacity the agency had nurtured through a period of relative financial stability.”

--“A different, but equally important, institutional consideration relates to the fact that the resolution regime directly and significantly affects preexisting contractual and property rights… it must still operate in a manner that respects the rule of law and that is perceived as such. If the regime were administered in a way that appeared to be based on politically-motivated favoritism or hostility, it would risk being undermined.”

--“Legislation should probably contain both (a) a mechanism to involve agencies such as the Treasury and the Federal Reserve in the decision to invoke the regime, and (b) a high standard for doing so, such as the likelihood of a serious adverse effect on economic conditions or financial stability or the presence of unusual and exigent circumstances.”

--It “does not cover insurance companies themselves to preserve the question of what the proper federal role in insurance regulation should be for the broader debate on regulatory reform.”

PROS:

--The plan “provides for the resolution of only those financial firms whose failure and resolution under otherwise applicable law would have systemic consequences.”

--The plan “provides that the new regime may be invoked with respect to a financial company only by the Secretary of the Treasury (after consultation with the President) upon the recommendation of two-thirds of the members of the Federal Reserve Board and two-thirds of the FDIC’s Board of Directors.” - (This is a very high standard to grant this power)

The Fed analysis suggested some standards that could be used to determine whether intervention was necessary:

“To invoke the regime with respect to a particular financial company, the agencies must determine that --

• The financial company is in default or is in danger of default;
• The failure of the company and its resolution under otherwise applicable Federal or State law would have serious adverse effects on financial stability and the U.S. economy; and
• Use by the Government of the powers or authorities granted by the legislation would avoid or mitigate such adverse effects.”

Also, the analysis noted that this sort of system could have been helpful in dealing with the near-collapse of American International Group (AIG): “The conservator or receiver could take control of the company, change management, and repudiate contracts entered into by the financial company … Establish a bridge financial institution to assume assets and liabilities of the failed firm; and Haircut creditors and shareholders to the extent consistent with maintaining financial stability.”

“Provides the Secretary of the Treasury the flexibility to select any Federal agency to serve as conservator or receiver for the failing company.” It could be the FDIC, the Securities and Exchange Commission, the Commodity Futures Trading Commission “or a new Federal insurance agency depending on what agency was best suited to resolve the particular institution.”