The derailing of the mortgage industry's secondary markets is hitting everywhere -- including some of the nation's largest credit unions, according to a published report Monday morning, which said that reported losses at the nation's five largest credit unions now total some $5.7 billion. That total may be even higher than reported, as well, given allegations that the credit unions facing the largest losses are playing a shell game with their accounting efforts. The Wall Street Journal reported that, like anyone else that's invested into RMBS these days, five of the nation's largest so-called corporate credit unions -- U.S. Central Federal Credit Union; Western Corporate Federal Credit Union; Members United Corporate Federal Credit Union; Southwest Corporate Federal Credit Union; and Constitution Corporate Federal Credit Union -- are taking losses on investment grade subprime and Alt-A RMBS, as the value of securities in both sectors plummets. Corporate credit unions aren't consumer facing, but provide investment services and financing to more regular credit unions nationwide. The $5.7 billion in losses on paper are enough to wipe out the net worth of each of the five credit unions, the Journal said; aggregate negative equity after accounting for so-called "unrealized" losses on the RMBS securities is $2.9 billion, although that total doesn't account for membership capital, or the float of funds tied to regular credit unions. A shell game? The most explosive allegations in the Journal's story, however, are that the two credit unions absorbing the biggest RMBS hits -- U.S. Central FCU and Western Corporate FCU -- are using accounting tricks to potentially hide further losses. The games being played here aren't all that different from what's being observed in other sectors, but take on new significance because credit unions don't have ready access to new capital, a la Merrill Lynch & Co. (MER) and others. Both credit unions earlier this year reclassified a huge chunk of their assets as "held for investment," moving them out of the more traditional "available for sale" accounting category; it's a shift that the federal regulator overseeing credit unions said had never been done in the industry's past. It's also a shift that means any valuation changes that are deemed temporary in nature don't have to be recorded against income. By June, U.S. Central had placed $10.9 billion of its $35.3 billion in investments into the "held for investment" category, according to the Journal, while Western Corporate has moved one-third of its total investments -- $9.6 billion -- into the same category. Both moves came as the secondary markets locked up and the companies say they decided it would be better to hold the assets until maturity (or they realized they'd never be able to sell an illiquid asset, take your pick). But how much of the current depressed valuations of subprime and Alt-A -- even the AAA-grade stuff -- can honestly be considered "temporary?" At what point is an other-than-temporary permanent impairment charge warranted? In our view, the two credit unions in question might be the last holdouts on Earth at this point still adamantly saying their securities will recover in value at some point, or that they'll be able to hold them to maturity. More than a few commercial and investment banks strutted the same point out roughly two quarters ago, and have since abandoned the line of thought as the mess has come into clearer view. The Journal story cites the example of Southwest Corporate, a credit union that holds $2.5 billion in subprime, Alt-A and home-equity RMBS -- but hasn't moved assets into "held for investment." Southwest Corporate recorded $672 million in unrealized losses on its RMBS investments through May; were just $100 million of that total deemed permanent, the credit union would have fallen below its regulatory minimum capital threshold. Despite mounting concerns, Kent Buckham, director of the National Credit Union Administration, called the possibility that a corporate credit union might fail "remote." The last such failure was in 1995, according to the Journal story. Disclosure: The author held no positions in MER when this story was published; indirect holdings may exist, however, via mutual fund investments. HW reporters and writers follow a strict disclosure policy, the first in the mortgage trade.