JPMorgan's big loss: FAQ

NEW YORK (CNNMoney) -- What, exactly, is going on at JPMorgan Chase? Something about whales?

Um, well, yes. Allow us to explain.

JPMorgan, which has more assets than any other bank in the country, announced Thursday that it has lost an awful lot of money over the past six weeks.

Now, the loss won't sink the bank. Not even close.

Net losses are estimated to total $800 million by the end of the quarter, although that number might go up. For context, the bank made $5.4 billion in the first three months of the year alone.

But the loss does raise all kinds of questions about the regulation of banks, the value of trading instruments called derivatives, the size of the world's largest firms and the systemic risk they may pose to the financial system.

So how did JPMorgan lose $2 billion?

Let's journey to London, because that is where JPMorgan has, for the past few years, been ramping up activity in a little-known unit it calls its chief investment office.

The unit is in charge of hedging the firm's risk, which is a fancy way of saying it operates as a kind of insurance agency. When a big bet is made, the office tries to find ways to mitigate the risk to the bank should the bet go south.

Over the past few months, the unit has staked out a very large position in insurance-like bets called credit default swaps, the same type of instrument that caused so much havoc in 2008.

The trader responsible for placing these bets is said to be Bruno Iksil, who has acquired a set of unfortunate nicknames, including the White Whale, the London Whale and Voldemort.

According to the Wall Street Journal, Iksil's credit default positions were so large that they caused unusual market movements on occasion, prompting some hedge funds to make large opposing bets.

There is no evidence that Iksil did anything improper, or acted without the approval of his supervisors. But when the bets started to sour, the bank lost money.

How bad is it for JPMorgan?

The loss is bad enough that the bank felt compelled to hold an after-hours conference call Thursday with reporters and industry analysts.

CEO Jamie Dimon, who was extremely agitated on the call, said the losses were caused by "errors," "sloppiness" and "bad judgment."

But Dimon was quick to defend JPMorgan's overall track record: "When you look at all the things we've done, we've been very careful. And we've been quite successful. This obviously wasn't."

Should the loss stay in the $2 billion range, JPMorgan will likely emerge relatively unscathed.

The chief investment office's portfolio has registered gains of $1 billion in other areas, and Dimon said that even after the loss, the bank's overall profit should be in the $4 billion range this quarter.

How bad is it for you?

This is not good news for investors who own JPMorgan or other banking stocks.

JPMorgan (JPM, Fortune 500), naturally, led the bank stock declines Friday, with shares dropping nearly 8% in mid-afternoon trading.

Morgan Stanley (MS, Fortune 500), Goldman Sachs (GS, Fortune 500) and Citigroup (C, Fortune 500) were all down as well.

It's too early to say whether the decline will have any meaningful long-term impact on the banking sector.

But the loss, and the way JPMorgan handled it, has the potential to tarnish the reputation of the bank, and especially its CEO, who successfully steered the firm through the 2008 financial crisis.

Broader implications

In the wake of the financial crisis, critics have made the case that the biggest banks are still so large, so complex, and their desire for profits so great that they remain a systemic risk to the global financial system.

The White Whale incident will only bolster their case; and timing is key. Right now in Washington, regulators are working to implement the so-called Volcker Rule.

That rule, a part of the Wall Street reform law passed in response to the financial crisis, aims to ban risky trading by banks for their own profit, a strategy sometimes referred to as proprietary trading.

Banks have been furiously lobbying regulators and lawmakers in an effort to weaken the provisions of the rule, and much has been made of the ways banks will work to circumvent the rule in an effort to ensure continued profits.

Dimon said Thursday that the trades didn't violate the Volcker Rule, but that the timing of the incident is "very unfortunate ... it plays right into the hands of pundits out there, but that's life."

That's because critics say the bets JPMorgan was placing, while maybe not technical violations of the Volcker Rule, sure seem like an attempt to drive profit for the firm.