How do you lose so much money so quickly? The short answer is, leverage. Although details are not known, one likely scenario ([1], [2]) involves derivatives constructed from the riskier components of some European corporate bonds. Using derivatives, you can buy or sell securities or pieces of securities that you do not yourself own, involving a potential promise to deliver more money than you even have. If the market moves against you, you'll have to deliver substantial real cash to unload your commitment, and this process appears to be what produced the sudden losses. The Whale's notional exposure in one index was speculated to have been $100 billion in April.
The total notional exposure of all of JP Morgan's trades has been estimated to be $79 trillion. That's "trillion", with a "T", from a company with an equity value of $140 billion, and falling quickly.
Paul Krugman suggests that in the case of the trades by the London Whale, JP Morgan "was just engaging in financial tricks of little or no social value". One could argue that the role of leveraged bets through derivatives is to allow those who really know what the value of the underlying security should be to help guide the market to that correct valuation. But if you're making your bet with somebody else's money, where the deal is you get the upside and somebody else gets the downside, those leveraged bets aren't so likely to be in the public's interest..."
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