THE BURNED OVER DISTRICT

Everybody's favorite Bankster and CEO Jaime Dimon of J P Morgan Chase let the world know that the banca di tutte banche managed to book $2 Billion in trading losses.

The $2 billion loss came from a complicated trading strategy that involved derivatives, financial instruments that derive their value from the prices of securities and other assets. JPMorgan said the derivatives trades were part of a hedge, meaning they were set up to offset potential losses on the bank’s large holdings of bonds and loans. But, in the sort of nightmare situation that bankers dread, the ostensible hedge backfired, producing losses of its own.

Since the financial crisis, several financial institutions have been rocked by risky trading, although under very different circumstances. At UBS, $2 billion in trading losses was attributed to a rogue trader, while MF Global collapsed not because of its bet on troubled European sovereign debt, but as a result of a loss of confidence that trade produced.

But JPMorgan’s trade was not so obviously fraught with risk. It produced large losses even without extreme movements in the derivatives markets or underlying bond markets. Indexes that track derivatives tied to corporate bonds have recently increased — reflecting a gloomier outlook for corporate bonds — but the move has not been jarring.

JPMorgan likely structured the trade in such a way that effectively magnified losses. Specifically, the bank bought insurance against losses on corporate debt through credit derivatives that increase in value if the underlying creditworthiness of companies is perceived to have deteriorated. But JPMorgan stumbled when it tried to modify that trade by also making an opposite bet with credit derivatives. Mr. Dimon said that the strategy “to reduce the credit hedge” was “poorly constructed and poorly monitored.”

JPM got burned by their hedge, but there is no need for tighter regulation. JPM would have found a way around them anyway. In the meantime, the losses may continue to grow.

"JPMorgan Chase C.E.O. Jamie Dimon has been a relentless critic of financial reform,” said Dennis Kelleher, president of Better Markets, which supports tougher regulation of banks. The surprise loss, he said, “proves him wrong.”