If it wasn’t so expensive, the falling dominoes in the economy might be somewhat amusing. Today’s case in point are the credit unions, more specifically the corporate credit unions.

The WSJ is reporting that the government moved to guarantee $80 billion in uninsured deposits of the corporate credit unions and will inject $1 billion of new capital into U.S. Central Federal Credit Union, the biggest of the corporate credit unions. U.S. Central posted a loss of $1.1 billion for 2008.

For those not familiar with this corporate credit union animal, let’s digress for a second. These firms are owned by the credit unions and basically function as their bank. They aggregate funds from smaller credit unions and invest on behalf of the credit unions. The theory being that by pooling their funds, the credit unions get the purchasing power of the big boys. So much for theory.

Now, it’s going to come as no surprise to you that the problem the corporate credit unions have run into has to do with mortgages. Yep, good old mortgage backed securities. Who would have guessed? Actually, someone should have because this isn’t a new story. Housing Wire called this one back in early December. Now here is what makes this amusing. When a few inquiring minds started looking at the corporate credit unions and posing some questions, these guys reared up and said they were just fine.

In August, the Wall Street Journal had suggested that many of the nation’s largest corporate credit unions were reeling from exposure to bad mortgage investments. The Journal reported then that the nations’ five largest corporate credit unions were facing $5.7 billion in losses tied to RMBS and CDO investments gone sour — enough to wipe out the net worth of each, according to the Journal’s calculations.

Leaders at various credit unions implicated in the story have bristled publicly since then at the suggestion that the nation’s credit union system may face some problems, or that they had mismanaged funds by investing heavily into mortgage-backed derivatives. Obviously, relative to some of the private investment banks, and many commercial banks, credit unions have been far more conservative in their risk management approaches.

Well, I guess now we know that they haven’t been all that conservative after all. And of course, the regulators have been on top of this all the way. The government agency that supervises credit unions is known as the NCUA. It’s run by a Mr. Michael Fryzel. Here is what he told the Journal.

U.S. Central, the institution that posted the loss Wednesday, said it was due to a decision to writedown $1.2 billion in losses on its portfolio. U.S. Central previously had reported $5.6 billion in paper losses on its investments, but until recently believed it wasn’t necessary to write down some of those on a permanent basis.

NCUA’s Mr. Fryzel said regulators found out about the losses on Monday, and immediately began to plan how to cope. He said the size of the losses “gave us greater concern” that other wholesale credit unions might accelerate their withdrawal of funds from U.S. Central.

That’s almost Paulsonesque. Get blind sided by something everyone has been pointing fingers at since August and then do the knee jerk bailout dance. Where do they find these guys?

The Journal article implies that this is a problem with the corporate credit unions, not the retail credit unions. But if I understand this correctly, the owners of the corporates are the retail outfits. So if the corporates are impaired doesn’t that mean that the retail outfits have to be feeling some pain as well? Do you think that we might see all of this flowing downstream in the near future?

more: here (WSJ article if you have access) and here (Housing Wire December 10)