Former Treasury Department secretary Henry Paulson told the Financial Crisis Inquiry Commission (FCIC) today that the US mortgage finance system -- and in particular the government-sponsored enterprises (GSEs) -- ran under an "inherently flawed" structure and outdated regulation that failed to keep up with a changing market. He told the congressionally-appointed panel tasked with investigating the cause of the current financial crisis that policy decisions "shaped the home mortgage market." For example, he said, the US "has always encouraged home ownership" for qualified, sustainable borrowers. Ultimately, however, loans were made to borrowers that could not maintain payments, and financial products unraveled. "We were living beyond our means, on borrowed money and borrowed time," Paulson told the FCIC. "Consumers, businesses, and financial institutions all overextended and overleveraged themselves with inevitably disastrous results while our federal and state governments continued to borrow heavily, jeopardizing their long-term fiscal flexibility." He said that the GSEs "operated under an inherently flawed model of private profit backed by public support, which encouraged risky revenue seeking and ultimately led to significant taxpayer losses." Additionally, the financial regulatory system ultimately proved to be "archaic and outmoded" -- and taxpayers picked up the tab for failed financial institutions. "These problems must be addressed," Paulson said. "Our financial system cannot move forward without fortifying the weak parts of its infrastructure. But in addressing these problems, we must make sure we retain the benefits of the underlying financial innovations." He added: "In our haste to deal with the flaws in the non-bank financial system, we should not move ourselves back to a system of consolidated, monolithic commercial banks." The Senate is in the process of considering financial regulatory reform. Congress pushed through a handful of amendments yesterday afternoon that are now tacked on to the financial regulatory reform bill sponsored by Sen Christopher Dodd (D-CT). Write to Diana Golobay.