JPMorgan Chase & Co. (NYSE:JPM)‘s $2 billion loss is THE talk this weekend, and likely to continue for a while. Millions have stories have been written on the topic, but we think we might have the biggest.

Details about the $2 billion ‘hedge’ are still murky, but right away we suspected that it might have been a ‘hedge’ against European exposure. With the European crisis now hitting Spain, that has been an area the market has been following extremely closely. Traders in London we have spoken to have mentioned a lot of activity by large hedge funds in the European markets. Large hedge funds happened to be on the opposite side of this trade. We also cannot think of a large hedge right now just from a purely speculative point of view, but we have more below on our theory.

Lisa Pollack of FT Alphaville speculates that JP Morgan’s losses stemmed from the trade discussed below:

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Again, our theory was that the CIO had put on a trade that bet that the CDX.NA.IG.9 — a credit index that was launched in 2007 which has decent liquidity due to the legacy of the CDO boom — would flatten.

According to the theory above, JPM was BEARISH on Corporates and put a ‘hedge’ against possible exposure. The loss of $2 billion which Dimon referred to occurred in the past six weeks according to the conference call.

Media outlets are continuing to report that the hedge was against corporate bonds, but we have no official confirmation. Lets speculate that the bank was hedging against European risk.

Here, is where the story gets juicy… Jamie Dimon conducted an interview from Davos and stated that a Greek Sovereign default’s impact on the bank would be “almost zero.” We stated that the comments were arrogant and possibly negligent. At the time, we were criticized heavily for using those words. Lo and behold the media are calling Dimon arrogant, including an article in the Huffington Post.

But that is not the important part, we gloat enough. Around the same time we took issue with a statement from a senior representative of JP Morgan:

J.P. Morgan Chase International Chairman Jacob Frenkel said on January 26th that the bank has exposure to European distressed debt of “about $15 billion,” but even “under the worst-case scenario J.P. Morgan will be fine.”

So here is where the story gets interesting, no one knows who authorized the trade. It appears that Bruno Iksil, the so-called London Whale was responsible for the $2 billion loss.

But it appears that there was no need to hedge against European exposure, since the bank was already prepared for a “worst case scenario.” So why at all would anyone be doing this? Assuming JP Morgan is telling the truth, it likely was a trade and not a hedge as the bank has claimed. If it was a real hedge, someone at JP Morgan was worried about European exposure. However, maybe JPM was hedging and was worried about Europe?

Case #1: It was a trade to make money. This just gives ammunition to the Volcker proponents. It would not be a big deal (in the context of our article) since the Volcker rule is not in place yet. However, JP Morgan lied by insisting this was a hedge, although there is a big grey area.

Case #2 it was a hedge, this could be far worse, even though the media is already portraying this as a trade to make JP Morgan look bad and press the Volcker rule.

Jamie Dimon in the call stated specifically that the trade wouldn’t have violated the Volcker rule because it was hedging activity. Now why would JPM be hedging at all based on what Jacob Frenkel said a few weeks ago?

Dimon claimed not to know about the trade originally, fair enough we will take him at his word. But he had to have known about Frenkel’s statement from an interview with Fox Business News. Additionally, he clearly was following the bank’s exposure to Europe.

Assuming the two following items are true JP Morgan has outright lied to investors, the press, etc.

1. The trade or hedge had to do with Europe

2. This was a hedge and not a trade.

Facts will continue to come out this week, but if this was related to Europe and in fact a hedge, JP Morgan will have a lot more explaining to do.

(The author of this article has no position in JP Morgan)

(This article was updated based on new information released recently, which stated the trade was related to North American corporate bonds.)