The Treasury Payment System Elon Musk Now Has Access To
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Hello and welcome to another episode of the Odd Lots podcast. I'm Joe Wiesenthal. And I'm Tracy Alloway. 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. Yeah. 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 was like, as soon as COVID hit. When you get more odd lots episodes, that's a bad sign. It's a sign. Yeah.

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 we one of our emergency episodes was about the deep seek sell off. There's just a lot going on. 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 to 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. And 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 ups

side 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 or debt or whatever. But it's actually we both like it when we get to talk about like how

How does money go from point A to point B? And this is an infinitely fascinating topic, but maybe sometimes people don't care. 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 coupons?

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 is 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 him on in a long time. And we're going to originally talk about something else. Maybe we'll get to that one day. We're going to be speaking with Nathan Tankus. He is the author.

author, editor, creator of the Notes on the Crisis Substack. So Nathan, thank you so much for coming back on Odd Lots. Well, I will say not Substack anymore, but yes, thank you very much. What is the Bureau of Fiscal Service? The Bureau of the Fiscal Service is...

So, you know, you can have big conversations about fraud.

foreign currency, about issuing treasury securities, about Social Security and Medicare and government spending and tax collection. Of course, 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 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

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 onboarded 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 work.

payment process that you have to do. And there's a physical architecture to the system. There's what, you know, 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,

As we'll get to, there's a sinking feeling in my stomach that maybe it shouldn't have. But...

It is quite a complex system that requires quite a specialized group of essentially aging programmers to manage this system and make sure that it is functioning properly and that 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, we need a cobalt klaxon. A cobalt klaxon. By the way, I went on IBM's website and I found some files where they had some cobalt examples. I dropped them into chat 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't they just go all over? Yeah. Actually, it's funny. I started playing with deep-seek before this crisis really got. I was having fun. You put it in deep-seek. And I loved 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...

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 and especially true for older systems. And no system is older than the treasury, even with the modernizations. You know, the modernizing these systems mean changing

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, ARM COBOL, that they use. These servers are now, or at least I think for the most part, running on Linux servers so that you'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 systems.

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 COBOL 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. Yeah.

I've been telling him for the last three days, please let me, you know, me in the Odd Lots interview, please, please. And it's going to take me a couple of weeks to get him. You can do it, Nathan. I believe in you. I'm working on it. This is the hardest informant task that I've had in the last five days. ♪

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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. What do we know? So, you know, there was a lot of very terrifying reporting. You know, I do 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 of the 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 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, confirmed their reporting from my sources independently. I unfortunately couldn't beat 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?

If someone has, quote, read-only access to it, what can they do? 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 is

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 lots 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 the operations departments at the Federal Reserve Banks should not just simply rely on

Know your customer laws, anti-money laundering and all sorts of other sort of safeguards for an authorized, you know, you know, 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 regularity 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 is

I mean, you know, it's like saying that 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 is.

It's 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 to think about this is that

The Treasury – the Bureau of the Fiscal Service is essentially – and thus the Treasury 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 traditionally when we talk about this, we talk about Treasury payments.

people consolidate the entire federal government and just say the treasury. 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. 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, etc. Yeah. But then ultimately they make some decision. The Department of Agriculture says, OK, 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 says,

Want 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.

push 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 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? Is there like another agency that could maybe step in and do some of this?

No, there is no rule book 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 rule book 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 the 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 decide to do anything. So you maybe like create an SPV 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 the way.

And then there is this other theory that some in 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, 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's

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? Yeah, sorry. This is what I'm trying to say.

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 money to be spent or an exact formula of money to be spent, the president does not have the authority to do that.

Just stop those payments.

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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 in

to 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 Trump

Right.

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 are

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 COBOL 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 I've done that confirms the Wired's reporting is that there is a 25-year-old SpaceX, former SpaceX employee, Marco Elez.

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 this 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 COBOL 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. Thank you.

Tracy, on the plus side, I like talking payment stuff. No, I really do. I mean, I think there are two main takeaways for 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

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 had a little piece warning about U.S. creditworthiness and saying like the rule of law gets eroded and that's kind of bad? Yeah.

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 issue,

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 binary.

right? 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, I'm not surprised that this isn't

You know, it's hard to price that stuff in. Here's a question. 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- Well, I think that's what actually tends to happen during debt ceiling crises, right? All right. Shall we leave it there? Let's leave it there. This has been another episode of the All Thoughts Podcast. I'm Traci Allaway. You can follow me at Traci Allaway.

And I'm Jill Weisenthal. 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. Dashiell Bennett at Dashbot. Cale Brooks at Cale Brooks.

For more OddLots 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 in our Discord, Discord.gg slash OddLots. And if you enjoy OddLots, if you like it when we dive into payments technology, then please leave us a positive review on your favorite podcast platform. And remember, if you are a Bloomberg subscriber, you can listen to all of our episodes.

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