Fannie Mae-No Politics (FNMA)

[LuLeVan]

What law allowed treasury to buy $250 billion of MBS in the summer of 2008?

There was no law. There was an emergency: China and Russia had bought huge amounts of MBS from Fannie and Freddie because they yielded 0.5% more interest than US Treasuries. The MBS were considered equally safe because they were implicitly guaranteed by the US government. The problem with the word "implicit" is that there was/is no direct guarantee. The Chinese were afraid that the MBS could become worthless in the wake of the US housing crisis, that they had bought "subprime junk". This was not true, but the concern was there.

To allay these concerns, the government offered China the opportunity to swap Fannie and Freddie MBS for US Treasuries - which actually happened. The dollar was very weak in mid-2008 ($1.60 to the euro), and the government was worried that if there was (Chinese) panic selling of MBS, the dollar would weaken even more. It was an emergency, the legal justification was cobbled together later.