Odd Lots - The Treasury Payment System Elon Musk Now Has Access To

Episode Date: February 5, 2025

Elon Musk and his Department of Government Efficiency (DOGE) have gained access to a unit within the Treasury Department called the Bureau of Fiscal Service. But what does this unit actually do? How critical of a role does it play in the operations of government, and potentially, financial markets? On this episode, we speak with Nathan Tankus, the author of the Notes On The Crises newsletter. He explains both the technical aspect of this office, as well as the legal questions surrounding impoundment and the ability of the executive branch to cut off payments that have been previously authorized by Congress. We also talk about the operational risks and the potential disaster scenario should this system — which has been built in COBOL over decades — go down. Read More: US Treasury Brings In Two Members From Musk’s DOGE Team Only Bloomberg.com subscribers can get the Odd Lots newsletter in their inbox — now delivered every weekday — plus unlimited access to the site and app. Subscribe at bloomberg.com/subscriptions/oddlots See omnystudio.com/listener for privacy information.

Bloomberg Audio Studios. Podcasts Radio News. Hello and welcome to another episode of the Odd Lots podcast. I'm Joe Wisenthall. And I'm Tracy Allaway. Tracy, the theme of the last two weeks has been, I don't know, emergency episodes of the podcast. Look, in some respects, it's not surprising.

New administration, new unexpected things. There's always going to be a flurry of activity when a new administration comes, unexpected stuff. But there's a lot. Yes. We're basically a daily show now, at least for the past two weeks. Well, it's like how we were a daily show. I mean, we used to just do one episode a week prior to COVID. That was like really the mark of the world changing. It's like, as soon as COVID hit. When you get more odd lots of episodes, that's a bad sign. It's a sign, right? So some people would say it's a good sign that there's a lot of stuff going on that people want.

But it's certainly a sign. And of course, there's been stuff going on on trade. I guess one of our emergency episodes was about the deep seek sell-off. There's just a lot going on right now. Yes, indeed. And we're going to talk about one of the other things that's been going on. Right. And so obviously we've known for a while since prior of the administration that Elon Musk and his Department of Government Efficiency would be coming in. To my mind, there's like multiple questions here.

I mean, there's just so many questions about what that is. You know, some people are like, oh, is it going to be about just making the government run more efficiently, sort of capital E, which probably a lot of people wouldn't object to in theory. Then there's, of course, the question about how much can an organization or an entity like this do unilaterally because a lot of the big spending decisions, they come out of Congress. One of the things that's happened, though, there's been a lot of reporting on this from multiple outlets, is that Elon Musk and his team have apparently gotten access to a key payment system within the Department of Treasury.

Yeah, so this has been all over the news in recent days. And I guess the downside is we have a group of unelected people who I think technically aren't government employees controlling the system through which the U.S. sends basically all its payments, like everything, social security to treasuries, all of that. But the upside is we get to talk about payments technology. So there's a small silver lining. Right. And, you know, look, this is actually, you know, we talk a lot about macro stuff on the podcast, so the amount of government spending that goes to this or that or deficits are dead or whatever. But it's actually, we both like it when we get to talk about, like, how does money go from point A to point B? And this is an infinitely fascinating topic. But maybe sometimes people don't care, but this is a time. But now they care. But now this is a time for people to care. Like, how does a payment actually. get made to anything, whether it's a Social Security recipient, whether it's to an independent contractor, whether it's to an employee, or whether it's to the holder of a government bond awaiting their coupon. Yeah, absolutely. Well, we're going to be speaking to someone who really knows payments and the intricacies. He seems to get really, I don't know many people who, like, are interested as going deep into how all these sort of like payments and accounting systems actually work going deeper than just the macro.

The perfect guest, we haven't had them on in a long time. And we're going to originally talk about something else. We'll get to that one day. We're going to be speaking with Nathan Tinkas. He is the author, the editor, creator, creator of the notes on the crisis substack. So Nathan, thank you so much for coming back on Oddlots. Well, I will say not substack anymore. Oh, yes.

Thank you very much. Newsletter, right. What is the Bureau of Fiscal Service? The Bureau of the Fiscal Service is a sleepy, obscure. part of the United States Treasury that make sure that all of the sort of operational things that the Treasury Department is doing operates. So, you know, you can have big conversations about foreign currency, about issuing Treasury securities, about Social Security and Medicare and government spending and tax collection. Of course, you know, the tax collection is an IRS

prerogative, but the other side of that, the sort of flip side of the IRS with tax collection is the payment side. And of course, those tax collections in turn run through the payment system. The Bureau of the Fiscal Service is what sends out tax refunds. So tax refunds are not actually technically an IRS prerogative in terms of making, had those payments going out. And the Bureau of the Fiscal Service is what does that. Eighty-eight percent of government. payments flow through this system every year. And it is what I've described as the beating, pulsating heart of the federal government's payments. Before you get to the banking system, before you get to the Federal Reserve, this is the heart. This is the artery that is making it all

function. It is the most important aspect of the federal government, even though no one's ever heard of it. How complex is it to actually send out these payments? Because on the one hand, I can kind of imagine a scenario where people are just, you know, pressing a button that says, like, pay this person, pay that person, pay whoever. But on the other hand, I also imagine we're talking about, you know, millions of individual payments. People might have to be like on boarded into the system. I imagine getting into the technology that we're talking about seriously old mainframe type computers like dinosaur systems. How hard is it to do this job? It's an incredibly complex task. I mean, we're talking about a mind-boggling scale of

payment process that you have to do. And there's a physical architecture to the system. There's what encoding is called the business logic. So not just the logic of like the abstractly the language of the program, but the business logic that is involved. The Treasury has, you know, belatedly gone into various payment modernization projects over the last 20 years. If, you know, as we'll get to, there's a sinking feeling in my stomach of that maybe it shouldn't have. But it is quite a complex system that requires a quite a specialized group of essentially aging programmers to manage this system and make sure that it is functioning properly and that, you know, all payments go out from the Treasury on time and that they never miss a payment and it's never delayed.

We like talking about aging systems that are taken care of by a handful of gray bear. We need a cobalt, I think. A cobal claxon, I think. By the way, I went on IBM's website, and I found some files where they had some cobalt examples. I dropped them into Chad GPT. I said, rewrite these in Python. It looked like it came out.

Can't they just do that? Copy and paste the whole thing, drop it into AI and say, rewrite this all in Python or something? Well, I mean, that is kind of what I was getting at. Or you're a deep seek guy. Can they just go all? Yeah, actually, it's funny. I started playing with Deep Seek before this crisis is really going. I was having fun.

Put it in D.C. And I, you know, I, you know, I loved, you know, getting some R code and building an economic model, proving my math skills and understanding the mathematical properties of models. It was great for that. It has a ton of data that it is based on that it can do that. And each system, I mean, this is true about generally any sort of business system that has developed for over a long time. But it's especially true for COBOL system. It's especially true for older. systems and no system is older than the Treasury, even with the modernizations. You know, modernizing these systems mean changing the physical architecture that they run on and maybe updating the language so that it can also be used on, say, a computer and not just a mainframe. And there's some unification of business logic that is all, but it's not getting rid of COBOL. And actually getting rid of COBOL would be a bet.

There's an updated version of COBOL, RM COBOL. that they use. These servers are now, or at least, I think, for the most part, running on Linux servers so that they've got modern operating systems. But they're still very, very complex, and it's still COBOL, and it's still decades and decades of business logic making the system run. And all of these systems are highly confidential system. In every bank in the world, in every, you know, major insurance company, every government.

So there just is not, like, a set, an example of confidential. data set of these things that can run on. And, you know, I should say, and this is part of why I'm so, you know, adept for this moment that my father was a cobalt programmer at Morgan Stanley. And he, for almost 20 years, he was the person in charge of making sure every financial advisor got their compensation. I've been telling him for the last three days, please let me, you know, me and the Odd Lots interview. please, please. And it's going to take me a couple weeks to get him. You can do it, Nathan. I believe I'm working out. This is the hardest informant task that I've had in the last five days.

Okay. So Musk slash Doge now have access to this incredibly complicated system as you just laid out. Do we know exactly what kind of access they have? Because there's been a lot of discussion over whether it's read only or maybe they have administrative rights. riots, what do we know? So, you know, there was a lot of very terrifying reporting. You know, you want to make a point of saying that when I first read the Washington Post reporting, which is the source that broke this in 3 p.m., I was absolutely terrified. I had an absolute panic attack. And, you know, as this story got started developing in Saturday, anonymous sources started leading, say, the New York Times, other sources to update their articles. saying, well, they only have read-only access. But there was never any public confirmation

idea. These were anonymous sources that were trying to placate the utter panic that was coming out. And wired at 1 a.m. today reported... Recording this February 4th. Recording this February 4th at 1219. But that's how fast the news cycle is now. We've got to give the exact minutes. Yeah. And so at 1 a.m., they exclusively reported for the first time that that is not true. They have read and write access, and I've reported as of 7.30 this morning, confirms their reporting from my sources independently. I unfortunately couldn't be two at first. I crashed out and fell asleep at 7 p.m., got up at 3 a.m. and got going. So what can you do with read-only access?

With read- If someone has, quote, read-only access to it, what can you? That means you can, my understanding is that means you can look at people's social security numbers. You can look at other confidential medical information, you know, all sorts of confidential information. You can look at the source code. And so come up with ways of restructuring the code and then propose those restructurings. And then it, you know, goes through a testing process and then try to get one of these aging

programmers to implement what you want. And do we have any sense of what Elon wants out of this access? I mean, this is the big question, right? And if you look at his account on Twitter slash X, he's talking a lot about, oh, I'm rooting out fraudulent payments or improper payments. And my impression of this Bureau is that, you know, the validity of payments isn't really their jurisdiction, right? Like their jurisdiction or their task is to send out the payments that have been mandated by Congress or other sources. they're not there to necessarily say, well, this payment is legit and that payment is not legit. Yeah. So, I mean, I think, you know, for an odd lot's audience who talks about the banking system a lot more and talks about the Federal Reserve, I think that is where to start to talking about this.

talking about having individual verification of payments and trying to determine improper payments at the technical operational level of processing payments is like saying that like the operations departments at the Federal Reserve banks should not just simply rely on know-your-customer-lawing-lawing and all sorts of other. sort of safeguards for an authorized, you know, an authorized payer to make payments. That, you know, the fundamental premise of the payment system, of any payment system that you're supposed to rely on is that whether or not a legitimate payment is going is determined by the process of letting people into the system. and that if a regularly show up with what is going on with one of these authorized users, then that gets investigated. Maybe they get shut out of the system.

But trying to examine the individual payments, I mean, you know, it's like saying that the operations department of the Federal Reserve banks have been improperly sending improper payments. Explain this further, because obviously, just in the abstract, the idea of being vigilant about improper payments. which is a good idea. I don't know how often they are, et cetera. But just sort of explain this idea further where, you know, in the vast system of the treasury is the place or the seat of these sort of judgments. And why is the, in your view, the Bureau of Fiscal Service not the sort of place to identify these? Yeah. So, I mean, you know, the big pictures that think about this is that the Treasury, the Bureau of the Fiscal Service is essentially,

and thus the treasurer as a whole, is essentially a fiscal agent for every administrative agency in the federal government and a very, maybe some other entities as well. And so, you know, traditionally when we talk about this, when we talk about treasury payments, people consolidate the entire federal government and just say the treasury. Yeah, yeah. And, you know, it's a shorthand that's useful for 99 purposes, just like other forms of consolidation would be. But for payment operational level issues and you ask that question or when you ask questions about it, you have to disaggregate the federal government and examine those payments up. So just for an example, the Department of Agriculture, they would have their own focus on who is getting a payment that's legitimate or not. The Department of Education would have a division that focuses on these things, et cetera.

Yeah. But then ultimately they make some decision. The Department of Agriculture says, okay, there's some subsidy to corn growers somewhere, but ultimately that just gets routed through the Treasury. Yeah, and the Bureau of the Fiscal Service wants those administrative agencies to have better internal controls. They have their own payments integrity unit, which is not supposed to investigate the payments themselves, but to help improve the controls.

There is one of these sprawling systems, is a do not. pay system where there is a list of do not pay that these files get pushed through before the payments actually get put out. And, you know, the Bureau of the Fiscal Service also has legislative proposals. Their last, you know, fiscal year 2024 report has seven legislative proposals. Five of them are about reducing improper payments, including giving them greater authority to require better internal controls from other administrative agencies. So these are known problems. the main barrier has been Congress has not budgeted enough and authorized enough to do this. And notably a lot of this needs legislation to do, both on, you know, internal legal things

within the federal government and also in terms of privacy protections for people, of doing responsible changes that's and make sure they're still privacy respecting. So the other word that's been flying around lately is impoundment. And I guess my question is, you know, if Doge starts cutting off certain payments for whatever reason, is there a backup contingency payment processor? Or is there like another agency that could maybe step in and do some of this? No. There's no rulebook or game plan. If this system goes down, then the payments don't go out that day.

And if they break this system in a way that takes months to fix, that we have no rulebook for this. Now, ironically, the memos that I've gotten through FOIA about what the Federal Reserve's game plan in case of Treasury default to the debt ceiling kind of makes this situation a little bit less stubborn to panic because you could like, you know, who's caring about legalities at this point anyway with this, you know, basically decided to do anything. So you may be like curate an SBV for each administrative agency, lend to it with, you know, 13.3 authority and then try to work out payments. But you still have to figure out who to pay and where. But there's two separate questions here when we're talking about impoundment. One is the theory of does something break? But then the other question is there is a legal theory. You know, the classic like sort of Constitution 101, Congress controls the power of the purse. And the Congress decides so and so gets money, et cetera, and then it goes out through. And then there is this other theory that some of the Trump administration support that actually the executive branch does have discretion about payments, so Congress could authorize something, but tell listeners about the legal debate about what impoundment is. Yes. So, and this is what I was covering Friday morning with my first.

I mean, that's how also how you know things are really bad is when there had been three notes of the crisis pieces in three days, in three business days. But the core issue is, as you said, the foundational constitutional principle is that Congress has control of the power of the purse. And that is not supposed to be abrogated. There is some, you know, the historical precedent here is the Nixon administration, the Impoundment Act of 1974 was meant to stop Nixon for impounding because he claimed that he could impound because, you know, Congress is spending too much and, you know, maybe inflation. Just to be clear, is the executive branch unilaterally deciding? Yes, sorry.

Yes, impoundment is the concept of the president deciding not to spend money that Congress has appropriated. And Congress appropriating the money is a directive to spend. And especially when Congress directs for an exact amount of, of money to be spent or an exact formula of money to be spent, the president does not have the authority to just stop those payments. I mean, you mentioned the impoundment control act of 1974. So there's obviously been some dispute about the basic premise that only Congress has this prerogative. Does this end up in a court fight?

Yes. I mean, that is the traditional check and balance in our system. is that the judiciary is supposed to step in and speak to a constitutional question and impose or say that a certain act that the president is engaging in is unconstitutional and should be stopped. In this situation, the obvious thing to say about that is that Trump appointed three of the nine Supreme Court justices that are on the Supreme Court. So it seems very unlikely, although not impossible, that the Supreme Court would actually step in and declare what Trump's is doing unconstitutional and even more importantly impose some sort of consequences or block to what Trump is doing.

But even if the court were to rule it unconstitutional, you would still need someone to actually enforce that decision, which seems like. it's pretty up in the air. One more question from me. So one of the interesting things about all of this is the Doge people who have access to the payment system. I think it's like a group of young 20-something-year-old programmers according to various reporting. I find it kind of funny because I always thought Cobal was like, you know, this thing that not a lot of people understood or there wasn't a lot of expertise in it, but apparently, you know, 20-year-olds seem to be able to understand it. What's the potential here that they actually mess something up pretty bad? The potential is absolutely enormous. The reporting that that I've done that confirms the Wired's

reporting is that there is a 25-year-old, former SpaceX employee Marco Elez, who, who has read and write access to the payment automation manager and the secure payment system of the Bureau of the Fiscal Service. It is an absolutely enormously terrifying situation. I had a source describe it as apocalyptic. There's no way to exaggerate how enormously dangerous this is. Every financial market in the world, in the country, in the world, should be pricing in the operational failure uncertainties of this system. Every single financial market should be pricing it in, and none of them are. None of them are even close. And just to be clear, my last thing.

So, like, bond payments run through this system. Bond payments run through the system. There's another COBOL system at the New York Federal Reserve, which I know less about, that was also part of that, but I think it still, foundationally relies on the cobal systems that it communicates with at the Treasury. Nathan Tankus, thank you so much for coming on up. That was great. Yeah, that was excellent.

Tracy, on the plus side, I like talking payment stuff. No, I really do. I mean, I think there are two main takeaways from me so far. It's like one is the idea that this team now just has such access to like such sensitive data is extraordinary to me. And two, I have zero doubt that it would be very easy to screw up something that is truly at the lifeblood of just like essentially how the entire economy operates. Yeah, absolutely. I guess we still have to learn more about what the end game is here and what Doge is trying to accomplish exactly.

The other thing I was thinking about was, you know, Nathan's kind of warning towards the end about the market. just overlooking a lot of this. And I kind of remember in the first Trump administration, do you remember one of the rating agencies came out and they have a little piece warning about U.S. creditworthiness and saying like the rule of law gets eroded and that's kind of bad? It's weird that we haven't seen a lot of that over. I guess it's still early. It's happening so quickly, but like, there hasn't been any of that in the past two weeks. Well, look, the way I would think about it is sort of like the debt ceiling, which is that the market will freak out when something happens, right? But before that, like, if something happens and there's a payment

system, something gets broken, then we're going to see a market freak out. But everyone, until that moment is just always operates, like, in the end, the payments will be fine. I don't think financial markets are good at situations like this, where it's very buying. where it's like the default is you just sort of expect the payments to keep on running and everything is fine, et cetera. The default is you expect them to always raise the debt ceiling eventually when they have to or the default is you expect the Fed to step in or whatever meant a trillion dollar coin. But like how to actually think about like payments not actually happening and they're not being an easy way to fix this system. I for one am not surprised that this is,

that is, you know, it's hard to price that stuff in. Here's a question. Yeah. If the system got messed up or payments were impounded or something, would treasuries go up or down? Oh, I love this question. I'm actually, I put myself in the category of if you own a bond and you miss a coupon, you freak out, you buy more bonds. I think that's where I eventually eventually. Well, I think that's what actually tends to happen during debt ceiling crises, right?

Yeah. All right. Shall we leave it there? Let's leave it there. This has been another episode of the Oddlots podcast. I'm Tracy Alloway. You can follow me at Tracy Allaway. And I'm Jill Wisenthal.

You can follow me at the stalwart. Follow Nathan Tankus. He's at Nathan Tankus and check out his newsletter at Crisesnotes.com. Follow our producers, Carmen Rodriguez, at Carmen Erman. Dash Obenet at Dashbot, Kale Brooks and Kail Brooks. For more OddLod's content, go to Bloomberg.com slash oddlots. We have transcripts, a blog, and a newsletter. And you can chat about all of these topics 24-7.

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