In a final day of hearings before the Financial Crisis Inquiry Commission, former Fannie Mae executives claimed that the company's hybrid nature as a stockholder-owned corporation with a government-chartered mission was a primary factor in its failure.

"Fannie Mae and Freddie Mac were established as financial institutions, restricted by law to the housing market, and tasked to provide financial liquidity to the housing market even when others chose to retreat," said former Fannie CEO Daniel Mudd. He argued that the ultimate cause of the company's troubles was its business model (PDF), and that Fannie Mae's sub-prime and Alt-A loans had lower rates of default than Wall Street's.
 
Fannie Mae, like Freddie Mac, is a government-sponsored mortgage giant that essentially became nationalized when the federal government rescued it in the fall of 2008. Both companies -- while beholden to the profit interests of private shareholders -- also had a congressionally mandated mission to provide affordable mortgages to low-income, aspiring home buyers. The companies' participation in the sub-prime mortgage market was in part fueled by a desire for profit, but primarily -- the execs argued -- done to meet its housing goals, particularly under pressure from the Clinton and Bush administrations, which focused on expanding home ownership.

"I wish I could have maintained the delicate balance of the roles assigned to Fannie Mae," Mudd wrote in his prepared statement. "I am sorry that I could not."

Fannie was a "unique entity," said longtime Fannie exec Robert Levin (PDF). It took both objectives seriously, but "this became more difficult when the markets experienced significant change and during periods of great stress in the system."

But let's back up a bit, to what the system was like before the stress hit.

From 2003 to 2006, Mudd said, the company watched its market share of single-family mortgage-backed securities fall from 45 percent to 23.7 percent as Wall Street moved into the mortgage market and began snapping up sub-prime mortgage securities. To compete, Fannie began investing heavily in the sub-prime and Alt-A mortgage market. Mudd claimed that in doing so, the company also hired experts to create the appropriate risk management controls.

As we've reported, those experts did their jobs -- they did alert the company to its risks. In 2007, as then-CEO Mudd told Fannie's board of directors that the company could support "taking more risk," one of Fannie's risk officers ranted to him in an email, "I have been saying that we are not even close to having proper control processes for credit, market, and operational risk."

Top managers at Fannie and Freddie "long understood that they and their shareholders would benefit from risk-taking as long as the higher risks created higher expected returns,” Dwight Jaffee, a professor at the UC Berkley's Haas School of Business, told the Financial Crisis panel last month.

Now the execs blame the business model that they say exposed the company to that risk. But let's not forget that the same business model, as James Surowiecki pointed out in 2008, is also what virtually ensured its rescue. The government has pumped more than $125 billion into Fannie and Freddie since it took them over in 2008. The Obama administration was originally expected to come up with a plan in February to restructure mortgage giants, but will not produce anything concrete until next year.

Mudd testified today that returning Fannie Mae to its original structure "could not logistically occur in our lifetimes." Treasury Secretary Timothy Geithner has indicated that the restructuring of Fannie and Freddie should not return the companies to their "unhealthy" shareholder-owned, government-backed structure.