The Treasury Payment System Elon Musk Now Has Access To

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1:23Hello and welcome to another episode of the Odd Lots podcast. I'm Joe Weisenthal. 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. Yeah. That was like really the mark of the world changing.

2:01It was like, well, as soon as COVID hit. When you get more odd lots 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. Yes, indeed. And we're going to talk about one of the other things that's been going on. Right. 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.

2:36To 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.

3:17Yeah. 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.

3:57But 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 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.

4:35He 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, editor, 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, but yes. Thank you very much. Newsletter, right.

5:06What is the Bureau of Fiscal Service? The Bureau of the Fiscal Service is a sleepy, obscure part of the United States Treasury that makes 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.

5:56The 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. 88 % 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.

6:46How 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 payment processes that you have to do.

7:30And there's a physical architecture to the system. There's what encoding is called the business logic. So not just the logic of the abstractly the language of the program, but the business logic that is involved. The Treasury has 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 of 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.

8:24We like talking about aging systems that are taken care of by a handful of graybeards. We need a COBOL klaxon. A COBOL klaxon. By the way, I went on IBM's website and I found some files where they had some COBOL 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 DeepSeek guy. Can they just go all – Yeah. Actually, it's funny. I started playing with DeepSeek before this crisis really going.

8:58I was having fun. You put it in DeepSeek. 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 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. 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.

9:50And 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 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, you know, and all of these systems are highly confidential system in every bank in the world, in every, you know, major insurance company, every government.

10:25So 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 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. 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. You can do it, Nathan. I believe I'm working on this. This is the hardest informant task that I've had in the last five days.

11:15Thank you.

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12:27EasyCater, your business tool for food. To learn more, visit easycater.com slash podcast. 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.

13:07I 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.

13:51They have read and write access. And I've reported as of 730 this morning, confirms their reporting from my sources independently. I unfortunately couldn't be to it 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 you do? My understanding is that means you can look at people's social security numbers. You can look at other confidential medical information, 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 goes through a testing process and then try to get one of these aging programmers to implement what you want.

14:41And 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 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.

15:33Talking 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 laws, anti-money laundering, and all sorts of other sort of safeguards for an

16:08authorized payer to make payments. 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, I mean, you know, it's like saying that that the operations department of the Federal Reserve banks have been improperly sending improper payments.

16:53Explain this further, because obviously, just in the abstract, the idea of being vigilant about improper payments 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 to think about this is that the Treasury, the Bureau of Fiscal Service is essentially, and thus the Treasury as a whole, is essentially a fiscal agent for every administrative agency in the federal government.

17:38and maybe some other entities as well. And so traditionally when we talk about this, when we talk about treasury payments, people consolidate the entire federal government and just say the treasury. And 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.

18:19The 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, 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.

19:04And the Bureau of the Fiscal Service also has legislative proposals. Their last 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.

19:49So 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 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 the situation a little bit less stubborn to panic because you could like – who's caring about legalities at this point anyway with this basically decided to do anything?

20:49So you maybe like create an SPV for each administrative agency, lend to it with 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. 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 there. And then there is this other theory that some of the Trump administration support that actually the executive branch does have discretion about payments.

21:30So Congress could authorize something, but tell listeners about the legal debate about what impoundment is. Yes. So, I mean, 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 – 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 Congress is spending too much and maybe inflation.

22:22Impounding, just to be clear, is the executive branch unilaterally deciding what to make? Yes, empowerment 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 just stop those payments.

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23:54That means your team is stuck gluing code together, piecing through spreadsheets, and running ad hoc queries just to figure out what to bill. With Metronome, you can roll out new pricing in minutes instead of months, whether it's usage-based, seat-based, or a hybrid model. Visit Metronome.com to see how companies like OpenAI and Anthropic launch billing as fast as they launch products. That's Metronome.com. 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?

24:31Yes. 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 is doing unconstitutional and even more importantly, impose some sort of consequences or block to what Trump is doing.

25:26But 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 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.

26:10What'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 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.

27:12Every 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 cobalt 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 cobalt systems that it communicates with at the treasury nathan tankus thank you so much for coming on up That was great. Yeah, that was absolutely great.

27:55Tracy, 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. One is the idea that this team now just has such access to 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.

28:45And 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.