WASHINGTON - The Treasury Department proposed legislation yesterday that would allow the federal government to prevent the failure of large non-bank financial companies in severe distress that pose systemic risks to the economy, including those with municipal securities divisions. But it was not clear if the legislation would cover bond insurers, and market participants said it raised constitutional and other questions.

In an outline of the draft legislation, which is expected to be submitted to Congress later this week, Treasury Secretary Tim Geithner asked for authority to use a method, similar to the blueprint employed by the Federal Deposit Insurance Corp., "to intervene at the appropriate time to avert systemic risks posed by the potential insolvency of a significant financial firm."

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