Will the Ratings Agencies React to the Breakdown in Governance?

It’s been three days since The Washington Post reported that “the highest-ranking career official at the Treasury Department [David A. Lebryk] left the agency after a clash with allies of billionaire Elon Musk over access to sensitive payment systems.” Lebryk was serving as acting Treasury Secretary while Scott Bessent, Trump’s nominee for the job, was going through the confirmation process.

Lebryk did his best to protect the Treasury from a hostile takeover, refusing to give in to members of Musk’s Department of Government Efficiency (DOGE), who had been pressuring officials for access since the election. But after Bessent was confirmed as Treasury Secretary last Monday, the White House put Lebryk on administrative leave. There was nothing more he could do, so he announced his retirement.

Bessent was now in charge. And Bessent, it turns out, is a Yes Man. He handed over the keys almost immediately. As the New York Times reported on Saturday:

Treasury Secretary Scott Bessent gave representatives of the so-called Department of Government Efficiency access to the federal payment system late on Friday, according to five people familiar with the change, handing Elon Musk and the team he is leading a powerful tool to monitor and potentially limit government spending.

I thought it was a four-alarm fire when we found out what Musk’s team was trying to pull off, but it became a five-alarm fire when we learned they had succeeded.

A Five-Alarm Fire

I’m not sure most Americans appreciate the gravity of the situation. (In fact, I suspect they don’t.) Here’s a useful thread from Nathan Tankus that drives at some of what’s at stake. In addition to privacy concerns—Musk’s team now has access to some of our most sensitive data, including our Social Security numbers, bank details, etc.—there is a real risk that a rogue group of infiltrators could gain operational control over the payment systems.

What could that mean? The Washington Post explains:

Typically only a small number of career officials control Treasury’s payment systems. Run by the Bureau of the Fiscal Service, the sensitive systems control the flow of more than $6 trillion annually to households, businesses and more nationwide. Tens, if not hundreds, of millions of people across the country rely on the systems, which are responsible for distributing Social Security and Medicare benefits, salaries for federal personnel, payments to government contractors and grant recipients, and tax refunds, among tens of thousands of other functions.

Or as Nathan put it:

Under the Constitution, once Congress appropriates funding for various programs—be it Social Security, Medicaid, the Inflation Reduction Act, or Meals on Wheels—it is up to the executive branch (the U.S. Treasury and the White House) to faithfully execute the law. As I wrote for Newsweek last week, no one—not Elon Musk or President Trump—has the legal authority to delay or cancel appropriations once they have been enacted into law. Any default would violate the Impoundment Control Act of 1974.

But that clearly doesn’t matter to President Trump and his team, who have already demonstrated a willingness to ignore the law. As evidence, look no further than the the administration’s attempt to claim sweeping powers to impound spending via executive order just last last week.

Indeed, a willingness to violate the law appears to be a pre-requisite for getting a top spot in this administration, as Senator Patty Murray (D-WA) highlighted in her questioning of Russ Vought (Trump’s pick to head the Office of Management and Budget) during his confirmation hearings last week. She said:

Mr. Vought, your written response when pressed on this [is] that you will follow the advice of the incoming OMB General Counsel, Mark Paoletta—someone who has called the Impoundment Control Act ‘a stupid law’ and recently tweeted at you to ‘impound baby impound’…

Make no mistake. There is a power grab—a coup—unfolding, and we are in a constitutional crisis. With each push for greater concentration of power in the executive branch, Congress is one step closer to losing its footing as a co-equal branch of government. Here’s the warning from the NYT (my emphasis):

The system could give the Trump administration another mechanism to attempt to unilaterally restrict disbursement of money approved for specific purposes by Congress, a push that has faced legal roadblocks.

Mr. Musk, who has been given wide latitude by President Trump to find ways to slash government spending, has recently fixated on Treasury’s payment processes, criticizing the department in a social media post on Saturday for not rejecting more payments as fraudulent or improper.

There is already a system in place to identify fraudulent payments before they reach the pay-out stage, but that won’t stop Musk’s team from claiming all sorts of payments are “fraudulent.” There’s also scope for widespread abuse when it comes to deciding what’s considered “improper.” Don’t like the Inflation Reduction Act or programs that provide essential services to low-income Americans? Classify them “improper” and default on those payments. Never mind that it violates the Impoundment Act.

In addition, we know that Musk believes that the U.S. government is going “bankrupt.” He’s obsessed with the size of the national debt, and he’s constantly claiming that inflation is always (and only) the result of excessive government spending. Now he’s pledging to bring inflation down to ZERO by cutting $4 billion per day in federal spending. Just how far would he go if he had the ability to unilaterally default on federal obligations?

So far, it appears that Musk’s team can use the payment system to extract, store, and analyze data, but it doesn’t have the ability to halt any payments. That’s because they don’t yet have “operational control” of the payment system. As Nathan wrote in his newsletter this morning, “yet” is the operative word.

This is not the attitude of people who are trying to simply technocratically make the payment system more “efficient.” They have a very clear and specific agenda, which involves unilaterally cutting spending, particularly spending they perceive to be going to their ideological foes…

[I]f Musk and Trump can reach into the choke point, the Bureau of the Fiscal Service, they could possibly not need agency cooperation. They can just impound agency payments themselves. They could also possibly stop paying federal employees they have forced on paid administrative leave, coercing them to resign.

It’s a five-alarm fire.

Will the Ratings Agencies Weigh In?

As the Wall Street Journal reported on Saturday:

Any interruption in…[the] operation [of the payment system] could result in far-reaching economic disruption. During negotiations over raising the debt ceiling, concerns about the continued performance of the payment system are at the core of the anxiety on Wall Street and in Washington.

So what happens if DOGE gains operational control and decides to start picking and choosing which government commitments to honor? The WSJ asked Don Hammond, who ran Treasury’s payment system in the late 1990s and early 2000s. It reported:

Hammond said he’s particularly concerned about the risks of giving access to people who aren’t federal employees—partly because of their ability to access or change the payments system and partly because of sensitive national-security payments made through the system.

“This is nothing like any transition,” Hammond said. “They’re putting themselves and putting Treasury in a place where it truly doesn’t have legal authority.”

Alarm bells should be ringing from on high, and I can’t help but wonder whether the ratings agencies—Fitch, Moody’s, and Standard and Poor’s—are going to weigh in.¹ The last time there was this much chaos and uncertainty (after the January 6 insurrection and debt ceiling shenanigans), Fitch downgraded its rating on US government debt from AAA to AA+, highlighting concerns about a “steady deterioration in [America’s] standards of governance.” It’s hard to see how they can look through this moment.

America isn’t broke, and it isn’t going broke. It issues a sovereign currency, and its payment obligations are denominated in that unit of account (US$). That means that the federal government can never be pushed into an involuntarily default on any of its commitments. It is likely that if Musk’s team initiates a default, it will be a default on general spending commitments rather than payments on existing Treasury debt. But if a band of lunatics mount a successful coup and start turning off payments, then a voluntarily default across a wide array of commitments is certainly possible. Musk has already identified interest expenditure as a “wasteful” form of government spending that he would like DOGE to cut.

And even if the Treasury continues to pay interest and principal to bondholders without interruption, seizing control of the payment system and arbitrarily defaulting on other commitments would surely demonstrate a further “deterioration in the standards of governance.”

It’s time to acknowledge the unprecedented breach of protocol, the brazen disregard for the rule of law, and the elevated risk of default.

1. I’m not suggesting that a downgrade would cause investors to sour on US Treasuries and force the administration to back down. It’s more about acknowledging the breakdown in governance and the elevated risk of voluntary defaults across the spectrum of government obligations.