(Reuters) - It's the biggest parlor game on Wall Street: Estimating how large JPMorgan Chase & Co's (JPM.N) trading loss will be from a hedging strategy that went wrong. 
 
 The biggest U.S. bank by assets has already disclosed $2 billion of paper losses, and Chief Executive Jamie Dimon said it could lose another $1 billion or more. 
 
 The losses will grow, some traders say, because it appears JPMorgan has only sold a small portion of its position, leaving it vulnerable to price swings in a thinly traded market. Others are not so sure the bank will suffer much more than it already has. Dimon said the bank won't rashly sell, and any additional losses could arise throughout the year. A JPMorgan spokeswoman declined comment. 
 
 The source of JPMorgan's problems is an obscure group of indexes that track the performance of corporate bonds. One of the indexes, the Markit CDX NA IG Series 9 maturing in 2017, is essentially a portfolio of credit default swaps - basically contracts that protect against default by a borrower. 
 
 This particular index is tied to the credit quality of 121 North American investment-grade bond issuers, including such names as Kraft Foods KFT.N and Wal-Mart Stores (WMT.N). 
 
 JPMorgan used that index, and others, to bet that credit markets would strengthen. Because that position is widely known on Wall Street, many traders are betting the opposite way in the hope of profiting as the bank's losses increase. The index has been moving against JPMorgan in recent days. 
 
 Oppenheimer & Co used the average of the index in 2011 - 141 - to estimate on a straight line basis a theoretical additional loss for the bank of $5.9 billion. Oppenheimer analysts, however, cautioned that such a large loss was unlikely. "We think the number will be less" than a $5 billion estimate, they said. 
 
 For starters, they said, JPMorgan likely offset the trading position before announcing the loss. Their analysis also reflects a trade in a vacuum without any counter-bets. Additionally, credit quality has been improving so "the underlying market has moved in JPM's favor," they said. 
 
 Some analysts are frustrated at how difficult it is to determine the source of the bank's losses. "I've been through this exercise a few times, and I can't make the numbers make sense," said Michael Johnson, chief market strategist at brokerage M.S. Howells, who helped put together earlier versions of the credit derivatives index. 
 
 The Markit CDX NA IG 9 index maturing in 2017 stood at 128 on May 10, just before Dimon announced the losses, up from 112 at end-March, according to Markit. Higher values for the index indicate the market sees credit quality as having deteriorated, which hurts JPMorgan. On May 11, the index jumped to 139, and on Wednesday, it traded near 150. 
 
 Without knowing the specific details of JPMorgan's trades, precise figures for the bank's losses are hard to determine. The total size of JPMorgan's bets and the dates and prices it paid to place the bets are not known. It's also not known what trades the bank has made to counteract the losses. 
 
 What's more, the current higher value of the index may entice hedge funds and other investors to sell credit protection on the index, which amounts to buying exposure to the portfolio of credits. If that happens it could help JPMorgan by moving the index level lower. 
 
 WHALE SPOTTING 
 
 JPMorgan's trades are based on credit derivative indexes conceived by JPMorgan and Morgan Stanley (MS.N) a decade ago to allow banks, hedge funds and corporate treasury departments to buy and sell insurance against the risk that corporate bonds they own might default. 
 
 JPMorgan sold credit insurance on the CDX index maturing in 2017 as a way of gaining exposure to the portfolio of credits, according to traders. On its own, that position would perform well if credit quality improves or stays more or less the same. 
 
 The traders don't know JPMorgan's precise trading positions but believe they can at least partially identify them given that the index is traded relatively infrequently and given the size of JPMorgan's presence in it. JPMorgan was such a significant player in the CDX NA IG 9 index that one of its traders, Bruno Iksil, was dubbed the "London whale" in the markets. 
 
 "When someone is that big in the market, anonymity really goes out the window," a New York-based debt trader said. 
 
 The bank is believed to have had offsetting bets to the same index maturing at the end of this year. Put together properly, the combination of selling default protection on the 2017 index and buying protection on the 2012 index would protect the bank against massive weakening in the credit market. 
 
 In addition, the bank is also believed to have made bets that a high-yield index would rise - that is, that high-yield debt would deteriorate - and an investment-grade index would fall or stay stable, traders said. This trade is also widely believed to have generated losses, according to the traders, though again they can't say with any certainty. 
 
 A key job for the bank's Chief Investment Office - which oversaw the index trading - was to hedge the bank against risks of default. As one of the world's biggest lenders, JPMorgan has hundreds of billions of dollars of exposure to credit, so it makes sense for the bank to hedge against the credit market doing poorly. The bank's hedge position is believed to have been crafted to generate few changes in value if the credit markets barely budged. 
 
 INCREASINGLY COSTLY 
 
 Over time, though, keeping the trade as a bet on the market turning down would have become prohibitively expensive, because as the 2012 index got closer to expiration it would offer less of a hedge against movements in the 2017 position. If the bank wanted to keep the trade hedged effectively it would have had to buy more and more of the 2012 credit default protection. 
 
 So, by January, JPMorgan faced a decision, according to credit derivatives traders: either reduce the size of its overall trade, or allow it to turn into more of an outright bet on credit markets improving. 
 
 JPMorgan opted to allow its protection against disaster to turn into a bet on markets improving, traders said. 
 
 There may have been merit to that decision initially. 
 
 In January, investors began to have a more optimistic view of the global economy, thanks in part to the European Central Bank's decision in December to give European banks cheap access to 489 billion euros ($623 billion) of financing. The ECB followed in February with another 529 billion euros of funding. 
 
 For a time that flood of money eased investor concern about the European debt crisis - and bolstered the view that corporations would be able to pay off their debt. Signs of strength in the U.S. economy and job market helped, too. 
 
 The corporate credit index began falling, a sign of credit fears abating. In October, the index hit 182, meaning it cost $182,000 to insure against $10 million of default through December 2017. By January, the index had fallen to as low as 121. In late March, the index hit 106. Those declines likely translated to healthy gains in the first quarter. 
 
 But in April and May, the indexes began rising as investors grew concerned about the durability of a recovery. The weakening credit market likely resulted in increasing losses for JPMorgan. 
 
 Matters worsened for the bank as hedge funds began betting against JPMorgan. That pushed up the index, giving the bank more losses. In the first nine days of May, the index climbed. On the 10th day, the bank stunned markets by announcing it had racked up more than $2 billion in losses. 
 
 ($1 = 0.7849 euros) 
 
 (By Dan Wilchins and Carrick Mollenkamp in New York; Editing By Alwyn Scott, Martin Howell and Ian Geoghegan) ||||| Simon Dawson/Bloomberg News 
 
 The trading losses suffered by JPMorgan Chase have surged in recent days, surpassing the bank’s initial $2 billion estimate by at least $1 billion, according to people with knowledge of the losses. 
 
 When Jamie Dimon, JPMorgan’s chief executive, announced the losses last Thursday, he indicated they could double within the next few quarters. But that process has been compressed into four trading days as hedge funds and other investors take advantage of JPMorgan’s distress, fueling faster deterioration in the underlying credit market positions held by the bank. 
 
 A spokeswoman for the bank declined to comment, although Mr. Dimon has said the total paper trading losses will be volatile depending on day-to-day market fluctuations. 
 
 Related Links Graphic: A Complex Strategy That Backfired 
 
 The Federal Reserve is examining the scope of the growing losses and the original bet, along with whether JPMorgan’s chief investment office took risks that were inappropriate for a federally insured depository institution, according to several people with knowledge of the examination. They spoke on the condition of anonymity because the investigation is still under way. 
 
 The overall health of the bank remains strong, even with the additional losses, and JPMorgan has been able to increase its stock dividend faster than its rivals because of stronger earnings and a more solid capital buffer. 
 
 Still, the huge trading losses rocked Wall Street and reignited the debate over how tightly giant financial institutions should be regulated. Bank analysts say that while the bank’s stability is not threatened, if the losses continue to mount, the outlook for the bank’s dividend will grow uncertain. 
 
 The bank’s leadership has discussed the impact of the losses on future earnings, although a dividend cut remains highly unlikely for now. In March, the company raised the quarterly dividend by 5 cents, to 30 cents, which will cost the bank about $190 million more this quarter. 
 
 A spokeswoman for the bank said a dividend cut has not been discussed internally. 
 
 At the bank’s annual meeting in Tampa, Fla., on Tuesday, Mr. Dimon did not definitively rule out cutting the dividend, although he said that he “hoped” it would not be cut. 
 
 John Lackey, a shareholder from Richmond, Va., who attended the meeting precisely to ask about the dividend, was not reassured. “That wasn’t a very clear answer,” he said of Mr. Dimon’s response. “I expect that shareholders are going to suffer because of this.” 
 
 Analysts expect the bank to earn $4 billion in the second quarter, factoring in the original estimated loss of $2 billion. Even if the additional trading losses were to double, the bank could still earn a profit of $2 billion. 
 
 And many analysts and investors remain optimistic about the bank’s long-term prospects. 
 
 Glenn Schorr, a widely followed analyst with Nomura, reiterated on Wednesday his buy rating on JPMorgan shares, which are down more than 10 percent since the trading loss became public last week. 
 
 What’s more, the chief investment office earned more than $5 billion in the last three years, which leaves it ahead over all, even given the added red ink. 
 
 But the underlying problem is that while these sharp swings are expected at a big hedge fund, they should not be occurring at a bank whose deposits are government-backed and which has access to ultralow cost capital from the Federal Reserve, experts said. 
 
 “JPMorgan Chase has a big hedge fund inside a commercial bank,” said Mark Williams, a professor of finance at Boston University, who also served as a Federal Reserve bank examiner. “They should be taking in deposits and making loans, not taking large speculative bets.” 
 
 Not long after Mr. Dimon’s announcement of a dividend increase in March, the notorious bet by JPMorgan’s chief investment office began to fall apart. 
 
 Traders at the unit’s London desk and elsewhere are now frantically trying to defuse the huge bet that was built up over years, but started generating erratic returns in late March. After a brief pause, the losses began to mount again in late April, prompting Mr. Dimon’s announcement on May 10. 
 
 Beginning on Friday, the same trends that had been causing the losses for six weeks accelerated, since traders on the opposite side of the bet knew the bank was under pressure to unwind the losing trade and could not double down in any way. 
 
 Another issue is that the trader who executed the complex wager, Bruno Iksil, is no longer on the trading desk. Nicknamed the London Whale, Mr. Iksil had a firm grasp on the trade — knowledge that is hard to replace, even though his anticipated departure is seen as sign of the bank’s taking responsibility for the debacle. 
 
 “They were caught short,” said one experienced credit trader who spoke on the condition of anonymity because the situation is still fluid. The market player, who does not stand to gain from JPMorgan’s losses and is not involved in the trade, added, “this is a very hard trade to get out of because it’s so big.” 
 
 He estimated that the initial loss of just over $2 billion was caused by a move of a quarter percentage point, or 25 basis points, on a portfolio with a notional value of $150 billion to $200 billion — in other words, the total value of the contracts traded, not JPMorgan’s exposure. In the four trading days since Mr. Dimon’s disclosure, the market has moved at least 15 to 20 basis points more against JPMorgan, he said. 
 
 The overall losses are not directly proportional to the move in basis points because of the complexity of the trade. Many of the positions are highly illiquid, making them difficult to value for regulators and the bank itself. 
 
 In its simplest form, traders said, the complex position assembled by the bank included a bullish bet on an index of investment-grade corporate debt, later paired with a bearish bet on high-yield securities, achieved by selling insurance contracts known as credit-default swaps. 
 
 A big move in the interest rate spread between the investment grade securities and risk-free government bonds in recent months hurt the first part of the bet, and was not offset by equally large moves in the price of the insurance on the high yield bonds. 
 
 As the credit yield curve steepened, the losses piled up on the corporate grade index, overwhelming gains elsewhere on the trades. Making matters worse, there was a mismatch between the expiration of different instruments within the trade, increasing losses. 
 
 The additional losses represent a worsening of what is already the most embarrassing misstep for JPMorgan since Mr. Dimon became chief executive in 2005. No one has blamed Mr. Dimon for the trade, which was under the oversight of the head of the chief investment office, Ina Drew, but he has repeatedly apologized, calling it “stupid” and “sloppy.” 
 
 Ms. Drew resigned Monday and more departures are anticipated.
– JPMorgan's $2 billion trading loss has become a $3 billion-and-counting loss with dizzying speed, insiders tell the New York Times. CEO Jamie Dimon predicted that the loss could double within a few quarters, but the extra billion in trading losses has come in just four trading days as hedge funds and other investors smell blood and bet against the positions the bank is believed to have held to hedge against defaults. JPMorgan's "London whale" trader was such a big player on the obscure indexes at the heart of the bank's problems that other traders are finding it easy to identify his trading positions, Reuters notes. "When someone is that big in the market, anonymity really goes out the window," notes a debt trader. The Justice Department and Federal Reserve are probing the losses, which experts say should never have been allowed to happen at a bank with government-backed deposits. But JPMorgan remains relatively healthy, despite the losses. The $3 billion loss would need to double to wipe out its profit from the second quarter of this year.