Credit risk always seems to come out of nowhere. But usually it comes out of somewhere…like the dirty, little recesses of a bank's balance sheet – the places where bankers hide all their unrecognized losses.

Ever since the suspension of rigorous mark-to-market accounting rules one year ago, banks have gained the ability to “time�? their credit losses. This development does not feel like progress. Banks now possess the ability to defer embedded credit losses for a very long time, in the hopes that a “typical�? postwar rebound in house prices and employment comes to fruition. But that's not happening. In fact, housing and employment conditions are worsening. As a result, the US banking sector has been piling up an enormous stash of unrecognized credit losses.