Hedges led to JPMorgan's losses

New York: How can a bank lose $2 billion in six weeks?

That's just one of the mysteries surrounding the news that JPMorgan Chase is gushing red ink from bad trading bets. As details slowly emerged on Friday, the shares of the nation's largest bank fell hard, as did those of several rivals. The story behind the loss is complex, and rich in irony. How it's view could influence regulators implement a major financial overhaul law called Dodd-Frank. How hard regulators crack down on banks could have a big impact on the stability of the financial system.

Here are answers to some questions about the loss:

How exactly did the bank lose so much so fast?

JPMorgan says the losses came from a trading portfolio designed to offset losses in the bank's lending business. Instead of offsetting losses, these so-called "hedges" added to them. The bank was worried that it might not get all its money back, so it bought protection. Though it didn't detail how it did this, banks typically buy credit default swaps, essentially insurance contracts that pay out when companies stiff their lenders. It gets more complex. In the world of banking, these hedges are themselvessometimes hedged, and that's exactly what JPMorgan did. The bank thought it had bought too much protection, so it hedged its hedge.

How does the ‘London Whale' figure into the story?

News reports before the bank announced its loss said that a trader at the bank dubbed the ‘London Whale' had invested heavily in an index of credit-default swaps, and that the bets were producing losses. But Jamie Dimon, the CEO of JPMorgan, said the news reports about London trades were only ‘somewhat related' to the losses.

Why are other bank stocks falling on the news?

It's not just the size of the bet that's scaring investors, but its complexity.Investors are uneasy also because JPMorgan has a reputation for managing risks better than almost anyone in the business. Investors seem to be asking: If this bank can lose $2 billion in six weeks, maybe others can too?

Finally, there's the regulatory threat. Investors fear that bank profits could be pinched by the Volcker Rule restricting trading that banks do with their own money, as opposed to clients' funds. Now that Dimon has been pushed off his pedestal, investors are worried that regulators will be tougher in enforcing the new rule.

Isn't the trading that led to the loss banned already?

No. The rule doesn't take effect until July, and even then regulators are suggesting banks will have another two years to comply.

Are more losses possible?

Dimon said he is trying to unwind the bad bets in a ‘responsible' manner to minimise losses, but prices can move against him.