Bloomberg Audio Studios, Podcasts, radio News. Hello and welcome to another episode of the Odd Lots Podcast.
I'm Joe Wisenthal 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 uh, 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 was like that, right, when you get more aud blots episodes, that's 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 part 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? So the 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 Treasure.
Yeah, so this has been all over the news in recent days, and I guess 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 US 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. Right, 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, showed 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 is an infinitely fascinating topic. But maybe sometimes.
People don't care, but this is now they care.
But now this is a time for people care, Like how does a payment actually get made to anything, whether it's a Social Security or 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 gonna 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 gonna originally talk about something else. We'll get to that one day. We're gonna be speaking with Nathan Tanks. He is the author, editor creator of the Notes on
the Crises Substack. So, Nathan, thank you so much for coming back on Oddlas.
Well, I we'll say not substack anymore, but yes, thank you very much.
You just let it write. 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 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 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, 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 twenty 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 beary.
We need we need a Cobyl clasic cobylic.
By the way, I went on IBM's website and I found some files where they had some Cobyl examples. I dropped them into Chad GPT. I said, rewrite these Python. It looked like it came out. Can't they just do that? Copy and paste the whole thing, drop it into a I'd say, rewrite this on Python or something.
Well, I mean that is kind of what I was getting at with.
You're a deep seat guy. Can't they just go, yeah, I've.
Been Actually it's funny. I started playing with deep seek before this, CRISTI is really good. I was having fun. You put it in, and you know, I I you know, I loved, you know, getting some R code and building an economic model, proving my mathemat skills and understanding the mathematical properties of monels. 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 COBAL system, 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 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 at all, But it's not getting rid of COBAL and actually getting rid of COBAL would be about there's an updated version of gobal arm goball that they use. These servers are now or at least I think for the most part, running on
Linux servers. That they've got modern operating systems, but they're still very, very complex, and it's still Cobal and it's still decades and decades of business logic making the system run, you know, and all of these systems are a 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 COBYL programmer at Morgan Stanley and he for almost twenty 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, be in me in the odd lots interview, please please, and uh, it's gonna take me a couple
of weeks to uh, you can do it. I believe I'm working at this. This is the hardest informant task that I 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. 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 three PM, 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 this was there was never any public confirmation the idea. These were anonymous sources that were trying to placate the utter panic that was coming out and Wired at one am today reported recording this February fourth, recording this February fourth, at twelve nineteen.
But that's how fast the news cycle is. Now, we got to give the exact minutes.
Yeah, and so at a at one am they exclusively reported for the first time that that is not true. They have read and write access, and I've reported as of seven thirty this morning confirmed their reporting from my sources independently. Unfortunately couldn't be to it first. I crashed out and fell asleep at seven PM, got up at three am and got going.
So what can you do with read only access? With read like, if someone has quote read only access to.
It, 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 looted 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, operation 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 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 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 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, 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 of 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 Treasure as a whole is essentially a fiscal agent for every administrative agency in the federal government and a various maybe some other entities as well, And so You know, traditionally, when we talk about this, we talk about treasury payments. People
consolidate the entire federal government and just say the treasury. Yeah, And you know, it's a shorthand that's useful for ninety nine percent 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 there.
For 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 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 buer
of the Fiscal Service also has legislative proposals. Their last you know, Fiscal year twenty twenty four 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 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. Is there like another agency that could maybe step in and do some of this.
No, there's 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 FOYA about what the federal reserves game plan in case of treasury default the debt ceiling kind of makes this situation a little bit less stuff on the 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 maybe like create an SPV for each administrative agency, lend to it with you know, thirteen point three 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 empundment. One is the theory of just something break. But then the other question is there is a legal theory, you know, the classic like sort of constitution one to one Congress controls the power of the purse, and the Congress decides so gets money, et cetera, and then it goes out there.
And then there is the other theory that some in the trumpe 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 called 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 is not supposed to be abrogated. There is some you know,
the historical precedent here is the Nix administra. The Impowerment Act of nineteen seventy four was meant to stop Nixon for impounding because he claimed that he could impound because you know, Congress is spending too much and they're you know, maybe just.
To be is the executive branch unilaterally decision sorry uh uh, Yes.
Impowerment 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 uh 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.
I mean, you mentioned the Impoundment Control Act of nineteen seventy four. 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, twenty something year old programmers, according to
various reporting. I find it kind of funny because I always thought Cobaal 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, twenty year olds seemed 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 WIREDS reporting is that there is a twenty five year old SpaceX former SpaceX employee, Marco Ales, who has read and write access to the payment Automation manager and the secure payment system of the Bureau of 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 finance market should be pricing it, 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 Coball 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 Coball systems that it communicates with at the Treasury.
Nathan Tankers, thank you so much for coming on up. That was great. Yeah, Tracy. On the plus side, I like talking payments 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 especially 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 peace warning about US credit worthiness 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 then, like if something happens and there's a payment system something gets broken, then we're gonna 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 defaults you expect them to always raise the debt sealing eventually when they have to, or the default is you expect the
Fed to step in or whatever. The mental 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 the system. I for what, I am not surprised that this isn't that you know, it's hard to price that stuff in.
Here's a question if the system got messed up or pays or 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 eventually, I think.
That's what actually tends to happen during debt sealing crises.
Right, yeah, all.
Right, shall we leave it there.
Let's leave it there.
And this has been another episode of the aud Thlots podcast. I'm Tracy Alloway. You can follow me at Tracy Alloway and.
I'm Jill Wisenthal. You can follow me at The Stalwart. Follow Nathan Tankers He's at Nathan Tankers, and check out his newsletter at crisesnoes dot com. Follow our producers Carman Rodriguez at Carmen Ermann, Dash o'b bennett at Dashbock, Kilbrooks at Kilbrooks. More odd lags content go to Bloomberg dot com slash odlocks. We have transcripts a blog in the newsletter, and you can chat about all of these topics twenty four to seven in our discord discord dot gg slash outline.
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