JPMorgan Chase & Co said on Thursday that it suffered a trading loss of at least $2 billion from a failed hedging strategy, a surprise disclosure that hit financial stocks and the reputation of the bank and its prominent CEO, Jamie Dimon.

For a bank viewed as a strong risk manager that never reported a loss throughout the financial crisis, the errors are embarrassing, especially in light of Dimon's public criticism of the so-called Volcker rule to ban proprietary trading by big banks, and could lead to more heat from Washington on the sector.

"This puts egg on our face," Dimon said apologising in a hastily called conference call with stock analysts and conceded that the losses were linked to a Wall Street Journal report in April about a trader, nicknamed the 'London Whale', who, the report said, had amassed an outsized position.

JPMorgan said in a filing with the Securities and Exchange Commission that since the end of March, its Chief Investment Office has had significant mark-to-market losses in its synthetic credit portfolio. Synthetic portfolios typically include derivatives in a way intended to mimic the performance of securities.

While other gains partially offset the trading loss, the bank estimates the business unit with the portfolio will post a loss of $800 million in the second quarter, excluding private equity results and litigation expenses.

That compares with a profit of about $200 million for the unit it had forecast previously.

"It could cost us as much as $1 billion or more," in addition to the loss estimated so far, Dimon said. "It is risky and it will be for a couple quarters."

BAD STRATEGY

The dollar loss, though, could be less significant than the hit to Dimon and the reputation of the biggest U.S. bank by assets - a bank which was strong enough to take over investment bank Bear Stearns and consumer bank Washington Mutual when they collapsed in 2008.

JPMorgan had $2.32 trillion of assets supported by $190 billion of shareholder equity at the end of March and has been earning more than $4 billion each quarter, on average, for the past two years.

"Jamie has always styled himself as one of the kings of Wall Street," said Nancy Bush, a longtime bank analyst and contributing editor at SNL Financial. "I don't know how this went so bad so quickly with his knowledge and aversion to risk."

JPMorgan shares fell 5 per cent after the closing bell, and other financial shares also fell sharply. Citigroup was down 2.4 per cent and Bank of America was down 1.7 per cent.

Analyst Paul Miller of FBR Capital Markets cut his target for the stock to $37 from $50 in response to the disclosures. The shares were at $40.74 before the news.

Dimon said he still believes in his arguments against the Volcker rule. The problem at JPMorgan, he said, was with the execution of the hedging strategy.

The strategy 'morphed over time' and it was ''ineffective, poorly monitored, poorly constructed and all of that," he said.

In the call, Dimon said he wouldn't take questions about specific people or their specific trading strategies. But he indicated that some people may lose their jobs as executives sort out what when wrong. "All appropriate corrective action will be taken as necessary in the future," he said.

WHALE OF A LOSS

The April Wall Street Journal report said a trader in JPMorgan's Chief Investment Office, nicknamed the 'London Whale' had amassed an outsized position that had caused hedge funds to bet against his position.

In the bank's earnings conference call in April, Dimon called the concern 'a complete tempest in a teapot'.

But on Thursday, Dimon said the bank's loss had 'a bit to do with the article in the press'. He added: "I also think we acted a little too defensively to that."

The Chief Investment Office is an arm of the bank that JPMorgan has said is used to make broad bets to hedge its portfolios of individual holdings, such as loans to speculative-grade companies.

"It's a pretty stunning admission for a company that prides itself on its risk management systems and the strength of its balance sheet," said Sterne Agee analyst Todd Hagerman.

"The timing couldn't be worse for the industry," he said. "At the end of the day, it will have ramifications across the broker-dealer community."

Just last week Dimon and leaders of other large banks met with Federal Reserve Governor Daniel Tarullo in New York to question the way the regulators conduct stress tests to see if the banks have enough capital to withstand possible losses. They also made arguments over trading restrictions.

Allegations that traders at the banks take outsized risks with bank capital to earn big bonuses have been among the drivers of government regulations adopted, and pending, since the financial crisis.

JPMorgan spokesman Joseph Evangelisti said the company uses pay formulas to reduce the chance of that happening in the Chief Investment Office and throughout the bank.

Except for people handling the bank's private equity investments, "no one at JPMorgan is paid on their profits and losses," Evangelisti said.

Regulators and lawmakers are now likely to push Dimon for more details about the trades. Those details will guide how regulators now view the issue and its impact on the Volcker rule, said Karen Petrou, managing partner of Washington-based Federal Financial Analytics.

If the trades were meant to hedge against specific risks as opposed to clearly being done as a proprietary bet on the markets, it may not play as clearly into the Volcker rule debate as supporters of the crackdown want it to, she said.

"The question is whether this in fact was a hedge and I think that's to be determined," she said. "That's really the heart of the matter." But at least some in Washington quickly expressed views on the lessons from the episode.

Senator Carl Levin, in statement issued two hours after the news broke, said, "The enormous loss JPMorgan announced today is just the latest evidence that what banks call 'hedges' are often risky bets that so-called 'too big to fail' banks have no business making."