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JPMorgan Chase (NYSE:JPM) got a $9 billion dose of reality today courtesy of The New York Times. In an article released this morning, the Times reported that, according to inside sources familiar with the firm's models, the losses on the so-called 'London Whale' trade are now expected to reach $9 billion, more than quadruple the original estimates. While this is certainly bad in and of itself, what it means for the composition of the remaining portion of the trade could be even worse for shareholders. Consider that the New York Times piece contends that

The bank's exit from its money-losing trade is happening faster than many expected... JPMorgan has moved rapidly to unwind the position - its most volatile assets in particular - internal models at the bank have recently projected losses of as much as $9 billion...With much of the most volatile slice of the position sold, however, regulators are unsure how deep the reported losses will eventually be.

Presumably, readers are supposed to come away from the article feeling two things: shock at the size of the loss and relief that the 'most volatile assets' have been sold. What is critical to note however, is that what JPMorgan most likely means by 'most volatile assets' is the massive amount of protection the firm's CIO desk sold on the IG9--the 'hedge of the hedge,' if you will.

This is only good if you believe in the soundness of the original hedge--the CDX tranche bet.

As I noted in a previous article, the firm (probably) sold the protection on the IG9 because its CDX tranche hedge was blown-up by the implementation of the LTRO in December, which squeezed systemic risk out of the system. The original hedge was a means of protecting the firm's long positions in credit by buying a swap on the senior tranche which would pay-off in the event Europe imploded and caused a systemic shock similar to that experienced after Lehman Brothers.

When the ECB instituted the first LTRO in December, it effectively ensured that no such systemic shock was in the cards, causing JPMorgan's tranche hedge to accumulate losses rather quickly. In order to make things right, the CIO desk began selling massive amounts of protection on the untranched IG9 index to hedge funds who were executing skew trades, gradually accumulating a precarious long bet.

In any case, that long bet (the 'risky' part of the trade and the hedge of the hedge) has apparently been unwound along with most of hedge fund's opposing positions. Today's New York Times article supports this notion. What is left is the original tail-risk hedge (the CDX tranche bet). As I noted in a previous article, the fact that net notionals in tranched IG9 have remained relatively unchanged indicates JPMorgan still has this position.

While the firm would likely say that this position is the unrisky part (it is the original hedge meant to protect against a systemic shock), it is clearly indicating that it learned absolutely nothing from the whole experience: That hedge is the one that blew-up in the first place and started the ball rolling in the wrong direction.

If you believe the ECB and the Fed will not let the European debt crisis cause another 'Lehman event', then you must necessarily be worried that JPMorgan now appears to be effectively naked in their tail-risk tranche position. If the ECB moves, that position could once again begin to accumulate large losses as correlation plummets.

For this reason, shareholders should be skeptical of the notion that the firm has sold the 'most volatile assets'. The volatility of the assets largely depends on the environment. Short JPM or long JPM puts.

Source: JPMorgan Loss Estimates Reach $9 Billion; The Real Risk Remains In Play