Two former senior executives with Fannie Mae appeared at a hearing before the Congressional Financial Crisis Inquiry Commission earlier this month and used an argument well-known to naughty children everywhere trying to explain away bad behavior: everyone else was doing it.

From the USA Today coverage of the hearing:

Just before the housing bust, executives at the Washington-based mortgage company worried about losing relevance as Wall Street companies issued mortgage securities and stole market share, according to a July 2005 internal presentation disclosed by the panel.

While executives were aware of “growing concern about housing bubbles,” the presentation said, they also feared the company could come a “niche player” amid competition from Wall Street.

“Could we really sit out?” Levin told the panel. “Would we be permitted to sit out? That’s what we were grappling with.”

Short-term concerns ultimately prevailed, and Fannie dived increasingly into riskier loans, like those that didn’t require proof of income.

Then, as the market turned down, Mudd noted “virtually every other housing sector investor fled the market.” Fannie and sibling company Freddie Mac “were specifically required to take up the slack.”

Members of the panel blasted the executives for failing to plan for a drop in home prices, and Mudd conceded that the company was consistently surprised as prices fell.

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