Rural Electrification Administration photograph of a woman turning on a washing machine. The REA was a New Deal program and the precursor of the Rural Utilities Service, an Agriculture Department agency.

One of the lesser known cogs in the federal government’s bureaucracy is its administrative rulemaking process, whereby agencies propose and establish federal regulations. Subsidyscope.com has recently looked at one example of the process using an interactive word tree of public comments on the Federal Deposit Insurance Program’s Legacy Loans Program.

The Legacy Loans Program is part of the government’s latest Public-Private Investment program aimed at ridding banks of troubled assets by partnering private investors, the Treasury Department, and the FDIC in investment funds that would buy troubled assets at auction.

In the end, the government bears most of the downside risk, and only half of the upside benefits.

The program was made possible through an emergency provision in the FDIC charter for times of systemic risk. Under normal circumstances, such agency-level changes would be bound by the 1946 Administrative Procedure Act, which would include the public in the regulatory process by allowing them to comment and by publishing drafts in the Federal Register.

In the name of transparency, the FDIC sought comments even though it wasn’t required to do so, and opened up a two week window from March 26-April 10 during which the public (and some paid lobbyists) weighed in. The FDIC is writing the rules for the program, taking into consideration those comments. Read more about the program and search the 400-plus comments about it here.

Interestingly, the Administrative Procedure Act was initiated as a result of another period of systemic risk, in an attempt to regulate the vastly expanding federal government during the Great Depression.

As part of his New Deal, Franklin Delano Roosevelt requested studies on the administrative process out of concern that giving newly created agencies and administrations a wide berth in policymaking could be unconstitutional. The act was meant to create a check on the administrative rulemaking process by codifying procedures.

Emory University law professor George Shepherd points out that the passage of the act was hotly contested, with conservatives arguing that it hindered individual rights, and liberals pushing for the need for flexibility and efficiency in times of great change. (Sound familiar?)

Shepherd calls the act a “bill of rights for the new regulatory state” that set the standard for the next 50 years on what the relationship between government, and private citizens, businesses and the economy. Agencies were given great latitude “limited only by relatively weak procedural requirements and judicial review,” Shepherd wrote in the Northwestern University Law Review in 1996.

Given that administrative procedures are often used to produce favorable outcomes, maybe the need to be transparent wasn’t the only motivation behind the FDIC’s move to open the Legacy Loans Program for public comment. Those comments did include a fair amount of supporters.

One of the questions the FDIC posed was whether the identities of the private investors should be made public.

One the side of transparency was The Center for Responsible Lending (one of the first groups to identify the housing crisis) which said public disclosures were essential “to ensure that homeowners can identify the ultimate owners of their mortgage loans, and that policymakers and independent analysts can meaningfully evaluate participants’ performance under the Program.”’

But then there were commenters like Michael Boxer from the private investment firm Ramius LLC, who said, “We believe that making all investors’ identities public may substantially reduce interest in the Program participation, particuarly among high-net-worth individuals and families who may not be interested in the publicity that participation would entail.”

Commenting on such programs is kind of like the lotto, you can’t win if you don’t play. Anyone can participate in the process by viewing and submitting their thoughts on proposed rules at Regulations.gov and the Federal Register.