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JPMorgan Chase & Co. (NYSE:JPM) have been taking a huge hit from trading in a little known index based on Credit Default Swaps movements. The loss was announced by JPMorgan at $2 billion after Bruno Iksil began selling an enormous amount of protection on the index. The “London Whale”, as Iksil is known, has since left the company.

The index in question, the Markit CDS NA IG 9 expiring in 2017, is so complex that even financial analysts argue about what exactly is going on and how JPMorgan managed to lose $2 billion on the trade.

JPMorgan is hemorrhaging money on this one. An estimate from May 23rd, which included recent index movements, suggested a figure of $7 billion for the loss. As the index continues to work against the bank the figure is likely to be higher than that now. High yield, as measured by HYG has gone down over 2% since that estimate from May 23rd.

High yield  debt chart

Iksil was selling protection on the index. That means, in general, that as the index rises JPMorgan lose money. Since JPMorgan’s announcement the index has jumped as more traders look to get involved in what seems to be a lucrative trade for those going against the investment bank.

Before JPMorgan’s reveal the index was trading at around 120 points. Now its trading at closer to 170. Because nobody has a clear idea of exactly what Iksil was doing or how JPMorgan are calculating the loss it is extremely difficult to estimate the losses. What is clear however is that they must be rising.

CDX NA IG 9 index

Estimates for the additional hit the bank will take range from about $1 billion to closer to $6 billion. Oppenheimer & Co., the investment bank, offered an estimate of $5.9 billion for the loss. The bank admitted that it is probably much lower than that. Their estimate is based on movements of the index from last year.

Almost all of the analysts who have attempted to study the trades have expressed frustration at being unable to make it correlate to the figures given for the loss. This is one of the biggest financial mistakes this year and nobody seems to be able to grasp the core concepts. One source at Business Week suggested the reason that Iksil was allowed to continue with his trades was because those over him did not understand his complex work.

Iksil, now unemployed, may be able to pick some consultancy work at the bank sorting out the mess.

JPMorgan’s loss will be someone else’s gain, we know Boaz Weinstein was one of the people who profited. That’s the nature of the index Iksil was working in. It is almost impossible to see where the money will go and it has to go somewhere. The trade has left a huge amount of money, $3-$9 billion, unaccounted for. In the market nobody leaves money on the table.

As awareness of this index and JPMorgan’s involveement in it has exploded it looks like the company is liable to lose more and more as time goes on. The international credit market is improving however. That means that those betting against JPMorgan are betting against the underlying basis of the index, a precarious position to take.

JPMorgan’s recent foray into the obscure indexes has brought to light the problems with the more complicated among financial instruments. Indexes like the CDS NA IG 9 are dangerous because they are not understood. Perhaps Bruno Iksil understands them and simply made a mistake but nobody else, particularly the regulators, have any real comprehension of the way these indexes move.

As JPMorgan’s losses mount that is important to remember.