February 5, 2025 • 28 mins
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
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Episode Transcript
Available transcripts are automatically generated. Complete accuracy is not guaranteed.
Speaker 1 (00:02):
Bloomberg Audio Studios, Podcasts, radio News. Hello and welcome to
another episode of the Odd Lots Podcast.
Speaker 2 (00:22):
I'm Joe Wisenthal and I'm Tracy Alloway.
Speaker 1 (00:24):
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.
Speaker 2 (00:44):
Yes, we're basically a daily show now, at least for
the past two weeks.
Speaker 1 (00:48):
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.
Speaker 2 (00:55):
It was like that, right, when you get more aud
blots episodes, that's bad sign.
Speaker 1 (01:01):
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.
Speaker 2 (01:17):
Yes, indeed, and we're going to talk about one of
the other things that's been going.
Speaker 1 (01:21):
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
(01:44):
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
(02:06):
access to a key payment system within the Department of Treasure.
Speaker 2 (02:11):
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
(02:31):
to treasuries, all of that. But the upside is we
get to talk about payments technology. Right, there's a small
silver lining.
Speaker 1 (02:40):
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.
(03:02):
But maybe sometimes.
Speaker 2 (03:03):
People don't care, but this is now they care.
Speaker 1 (03:05):
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
(03:28):
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.
(03:48):
He is the author, editor creator of the Notes on
the Crises Substack. So, Nathan, thank you so much for
coming back on Oddlas.
Speaker 3 (03:56):
Well, I we'll say not substack anymore, but yes, thank
you very much.
Speaker 1 (03:59):
You just let it write. What is the Bureau of
Fiscal Service.
Speaker 3 (04:02):
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
(04:29):
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
(04:50):
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
(05:15):
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,
(05:38):
even though no one's ever heard of it.
Speaker 2 (05:40):
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
(06:03):
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?
Speaker 3 (06:15):
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.
(06:38):
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
(06:59):
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.
Speaker 1 (07:19):
We like talking about aging systems that are taken care
of by a handful of gray beary.
Speaker 2 (07:24):
We need we need a Cobyl clasic cobylic.
Speaker 1 (07:27):
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.
Speaker 3 (07:42):
Well, I mean that is kind of what I was
getting at with.
Speaker 1 (07:46):
You're a deep seat guy. Can't they just go, yeah, I've.
Speaker 3 (07:49):
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
(08:10):
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
(08:34):
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
(08:57):
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
(09:17):
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
(09:40):
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
(10:00):
I'm working at this. This is the hardest informant task
that I that I've had in the last five days.
Speaker 2 (10:23):
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?
Speaker 3 (10:41):
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,
(11:03):
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,
(11:26):
recording this February fourth, at twelve nineteen.
Speaker 2 (11:29):
But that's how fast the news cycle is. Now, we
got to give the exact minutes.
Speaker 3 (11:33):
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
(11:55):
three am and got going.
Speaker 1 (11:56):
So what can you do with read only access? With
read like, if someone has quote read only access to.
Speaker 3 (12:02):
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,
(12:23):
goes through a testing process and then try to get
one of these aging programmers to implement what you want.
Speaker 2 (12:30):
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
(12:52):
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.
Speaker 3 (13:10):
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
(13:35):
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,
(14:01):
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
(14:23):
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.
Speaker 1 (14:41):
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
(15:05):
is the in your view of the Bureau of Fiscal
Service not the sort of place to identify these.
Speaker 3 (15:10):
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
(15:33):
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
(15:55):
to disaggregate the federal government and examine those payments up there.
Speaker 1 (15:59):
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
(16:22):
just gets routed through the Treasury. Yeah.
Speaker 3 (16:24):
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
(16:45):
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,
(17:05):
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
(17:27):
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.
Speaker 2 (17:38):
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
(17:58):
that could maybe step in and do some of this.
Speaker 3 (18:02):
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
(18:25):
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.
(18:48):
But you still have to figure out who to pay
and where.
Speaker 1 (18:50):
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
(19:10):
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.
Speaker 3 (19:24):
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
(19:47):
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
(20:07):
you know, Congress is spending too much and they're you know,
maybe just.
Speaker 1 (20:11):
To be is the executive branch unilaterally decision sorry uh uh, Yes.
Speaker 3 (20:18):
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.
(20:41):
The president does not have the authority to just stop
those payments.
Speaker 1 (21:04):
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?
Speaker 3 (21:18):
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,
(21:43):
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,
(22:06):
impose some sort of consequences or block to what Trump
is doing.
Speaker 2 (22:14):
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
(22:34):
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
(22:57):
the potential here that they actually mess something up pretty bad?
Speaker 3 (23:03):
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
(23:23):
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
(23:46):
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.
Speaker 1 (24:04):
And just to be clear, my last thing, so like
bond payments run through this system.
Speaker 3 (24:09):
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.
Speaker 1 (24:25):
Nathan Tankers, thank you so much for coming on up.
That was great. Yeah, Tracy. On the plus side, I
like talking payments stuff.
Speaker 3 (24:45):
No, I really do.
Speaker 1 (24:46):
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
(25:10):
like especially how the entire economy operates.
Speaker 3 (25:12):
Yeah.
Speaker 2 (25:13):
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.
(25:36):
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
(25:57):
of that in the past two weeks.
Speaker 1 (25:58):
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
(26:19):
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,
(26:43):
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.
Speaker 2 (26:56):
Here's a question if the system got messed up or
pays or impounded or something, would treasuries go up or down?
Speaker 3 (27:04):
Oh?
Speaker 1 (27:04):
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.
Speaker 2 (27:17):
That's what actually tends to happen during debt sealing crises.
Speaker 1 (27:20):
Right, yeah, all.
Speaker 2 (27:21):
Right, shall we leave it there.
Speaker 1 (27:22):
Let's leave it there.
Speaker 2 (27:23):
And this has been another episode of the aud Thlots podcast.
I'm Tracy Alloway. You can follow me at Tracy Alloway and.
Speaker 1 (27:29):
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,
(27:50):
and you can chat about all of these topics twenty
four to seven in our discord discord dot gg slash outline.
Speaker 2 (27:56):
And if you enjoy all blots, if you like it
when we dive into payment technology, then please leave us
a positive review on your favorite podcast platform. And remember,
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and follow the instructions there. Thanks for listening.
Bloomberg Audio Studios, Podcasts, radio News. Hello and welcome to
another episode of the Odd Lots Podcast.
Speaker 2 (00:22):
I'm Joe Wisenthal and I'm Tracy Alloway.
Speaker 1 (00:24):
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.
Speaker 2 (00:44):
Yes, we're basically a daily show now, at least for
the past two weeks.
Speaker 1 (00:48):
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.
Speaker 2 (00:55):
It was like that, right, when you get more aud
blots episodes, that's bad sign.
Speaker 1 (01:01):
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.
Speaker 2 (01:17):
Yes, indeed, and we're going to talk about one of
the other things that's been going.
Speaker 1 (01:21):
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
(01:44):
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
(02:06):
access to a key payment system within the Department of Treasure.
Speaker 2 (02:11):
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
(02:31):
to treasuries, all of that. But the upside is we
get to talk about payments technology. Right, there's a small
silver lining.
Speaker 1 (02:40):
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.
(03:02):
But maybe sometimes.
Speaker 2 (03:03):
People don't care, but this is now they care.
Speaker 1 (03:05):
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
(03:28):
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.
(03:48):
He is the author, editor creator of the Notes on
the Crises Substack. So, Nathan, thank you so much for
coming back on Oddlas.
Speaker 3 (03:56):
Well, I we'll say not substack anymore, but yes, thank
you very much.
Speaker 1 (03:59):
You just let it write. What is the Bureau of
Fiscal Service.
Speaker 3 (04:02):
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
(04:29):
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
(04:50):
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
(05:15):
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,
(05:38):
even though no one's ever heard of it.
Speaker 2 (05:40):
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
(06:03):
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?
Speaker 3 (06:15):
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.
(06:38):
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
(06:59):
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.
Speaker 1 (07:19):
We like talking about aging systems that are taken care
of by a handful of gray beary.
Speaker 2 (07:24):
We need we need a Cobyl clasic cobylic.
Speaker 1 (07:27):
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.
Speaker 3 (07:42):
Well, I mean that is kind of what I was
getting at with.
Speaker 1 (07:46):
You're a deep seat guy. Can't they just go, yeah, I've.
Speaker 3 (07:49):
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
(08:10):
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
(08:34):
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
(08:57):
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
(09:17):
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
(09:40):
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
(10:00):
I'm working at this. This is the hardest informant task
that I that I've had in the last five days.
Speaker 2 (10:23):
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?
Speaker 3 (10:41):
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,
(11:03):
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,
(11:26):
recording this February fourth, at twelve nineteen.
Speaker 2 (11:29):
But that's how fast the news cycle is. Now, we
got to give the exact minutes.
Speaker 3 (11:33):
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
(11:55):
three am and got going.
Speaker 1 (11:56):
So what can you do with read only access? With
read like, if someone has quote read only access to.
Speaker 3 (12:02):
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,
(12:23):
goes through a testing process and then try to get
one of these aging programmers to implement what you want.
Speaker 2 (12:30):
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
(12:52):
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.
Speaker 3 (13:10):
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
(13:35):
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,
(14:01):
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
(14:23):
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.
Speaker 1 (14:41):
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
(15:05):
is the in your view of the Bureau of Fiscal
Service not the sort of place to identify these.
Speaker 3 (15:10):
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
(15:33):
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
(15:55):
to disaggregate the federal government and examine those payments up there.
Speaker 1 (15:59):
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
(16:22):
just gets routed through the Treasury. Yeah.
Speaker 3 (16:24):
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
(16:45):
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,
(17:05):
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
(17:27):
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.
Speaker 2 (17:38):
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
(17:58):
that could maybe step in and do some of this.
Speaker 3 (18:02):
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
(18:25):
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.
(18:48):
But you still have to figure out who to pay
and where.
Speaker 1 (18:50):
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
(19:10):
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.
Speaker 3 (19:24):
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
(19:47):
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
(20:07):
you know, Congress is spending too much and they're you know,
maybe just.
Speaker 1 (20:11):
To be is the executive branch unilaterally decision sorry uh uh, Yes.
Speaker 3 (20:18):
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.
(20:41):
The president does not have the authority to just stop
those payments.
Speaker 1 (21:04):
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?
Speaker 3 (21:18):
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,
(21:43):
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,
(22:06):
impose some sort of consequences or block to what Trump
is doing.
Speaker 2 (22:14):
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
(22:34):
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
(22:57):
the potential here that they actually mess something up pretty bad?
Speaker 3 (23:03):
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
(23:23):
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
(23:46):
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.
Speaker 1 (24:04):
And just to be clear, my last thing, so like
bond payments run through this system.
Speaker 3 (24:09):
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.
Speaker 1 (24:25):
Nathan Tankers, thank you so much for coming on up.
That was great. Yeah, Tracy. On the plus side, I
like talking payments stuff.
Speaker 3 (24:45):
No, I really do.
Speaker 1 (24:46):
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
(25:10):
like especially how the entire economy operates.
Speaker 3 (25:12):
Yeah.
Speaker 2 (25:13):
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.
(25:36):
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
(25:57):
of that in the past two weeks.
Speaker 1 (25:58):
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
(26:19):
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,
(26:43):
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.
Speaker 2 (26:56):
Here's a question if the system got messed up or
pays or impounded or something, would treasuries go up or down?
Speaker 3 (27:04):
Oh?
Speaker 1 (27:04):
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.
Speaker 2 (27:17):
That's what actually tends to happen during debt sealing crises.
Speaker 1 (27:20):
Right, yeah, all.
Speaker 2 (27:21):
Right, shall we leave it there.
Speaker 1 (27:22):
Let's leave it there.
Speaker 2 (27:23):
And this has been another episode of the aud Thlots podcast.
I'm Tracy Alloway. You can follow me at Tracy Alloway and.
Speaker 1 (27:29):
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,
(27:50):
and you can chat about all of these topics twenty
four to seven in our discord discord dot gg slash outline.
Speaker 2 (27:56):
And if you enjoy all blots, if you like it
when we dive into payment 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
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