So let me get this straight, if I do delete all staff/players and do put players into every playable team the game will create regens based on the reputation of the team (if I did this to Barcelona or Chelsea, they'd get world class players, not amateurs and no nothing staff)??
I think it should work in exactly the way you said, and give players according to the teams reputation.
But on the other hand, this is an option used to cover primarily smaller clubs, for which there aren't enough players in the database, so there might be an element of gamble.
I think the best thing you can do is try it out.
For example, delete everyone in Chelsea let's say, start a new game, just for a test, and only load the Premier so it'll only take you a little time, and give an important answer.
I'd be quite curious to see how it went, too.