(By Don Miller) The House Financial Services Committee and the U.S. Treasury Department have released a draft version of legislation designed to address systemic risk and the issue of "too big to fail" institutions.

The proposed bill, spearheaded by U.S. Rep. Barney Frank, D-MA, the House's Financial Services Committee chairman, aims prevent big bailouts after the government last year spent over $200 billion to rescue American International Group Inc. (NYSE: AIG), Citigroup (NYSE: C) and Bank of America Corp.(NYSE: BAC)

Facing a room packed with Wall Street bankers and dealmakers, Treasury Secretary Timothy Geithner said they could not look America in the eye and argue that financial regulation is ready to protect the fragile financial system, Reuters reported.

Calling efforts to bring reform to the system a "war", he told the Securities Industry and Financial Markets Association annual meeting in New York that the government must respond by adding new regulations and strengthening old ones.

"It's a war of necessity, not a war of choice," he told the gathering. "And it's a just war."

The bill would grant the Federal Reserve, the Federal Deposit Insurance Corp. (FDIC) and a new systemic risk regulatory council the power to monitor and address risks to economic stability posed by shaky financial holding companies.

Key parts of the proposal would require financial firms with more than $10 billion in assets to pay for the unwinding of a collapsed competitor, and force at-risk companies to sell or transfer assets or stop certain activities if the central bank determined there could be a "threat to the safety and soundness of such company or to the financial stability of the United States," The Wall Street Journal reported. 

In addition, the proposal would set up a council of regulators to monitor potential threats to financial markets, abolish the Office of Thrift Supervision, make companies liable for part of the assets they securitize, and under certain circumstances, allow the Fed to force a financial company into bankruptcy, The Journal reported.

The draft legislation plugs a regulatory hole, missing until now, by giving the administration the legal authority, to take over a failing financial firm such as Lehman Brothers, which went bankrupt in 2008.

Even though Geithner and others have been pushing for the authority since last year, U.S. Rep. Jeb Hensarling, R-TX, remains skeptical.

"Based upon what I've heard [Rep. Frank] say in the past, I'm still fearful that the plan will de facto designate certain firms as being systemically risky, which is a precursor to a taxpayer bailout," he told The Journal.

Geithner will testify on the proposals in Congress tomorrow (Thursday).