is about how JP Morgan lost $2 billion on a bet that corporate bonds would do well (with a potential other $1 billion in losses forthcoming, I guess?)
This bet has been apparently public, and has been scrutinized in the financial press, for nearly a month - so much so that hedge funds began buying up the other side of the bet, which may have been at least part of the reason JP Morgan lost so much money.
This has also restarted a debate about the Volcker Rule, which is a rule that is designed to limit a bank's proprietary trading (trading for its own profit) while allowing it to continue hedge trading (trading to offset the risks a bank has merely by making its loans) - with the difficulty being, it's often hard to tell the difference.
The situation is incredibly complicated although it's often really hilarious to read insiders' discussion of it
. That said, I found this very long post
to be the best explanation - in the sense that it explains the technicalities pretty well. I don't know if it's for everyone - it may be too technical for some, or too simple for others, but it worked well for me. Some points I'd explain first, though - once people started detecting this trade, the trader was nicknamed the Whale of London or Voldemort, but his identity was actually revealed as a guy named Bruno Iksil.
And, just to be clear on the terminology: to go "long" on something is to bet that it will do well, to go "short" is to bet it will do poorly, and a hedge - as I explained before - is supposed to be a trade that covers your ass so that you aren't overexposed to a particular risk. To buy "protection" is to enter into a hedge that protects you against the risk of default - it will pay you money if the asset loses value. To sell protection is to promise to pay out to someone if the asset loses value. Therefore, when you "buy protection" you are making a bet that the asset will fail, essentially like buying insurance - you're taking the "short" side of the bet, to "hedge" against the fact that you already took the long side somewhere else. When you "sell protection" you're selling insurance; you're making a bet that the asset will do well and you'll never have to pay out.
Also, understand that JP Morgan has not revealed the details of what went wrong, so a lot of the posts on the subject are informed speculation.