Jamie Dimon, JP Morgan Chase CEO (AP photo)

The darkest and most frightening echoes of the 2008 financial crisis that rocked the global economy were stirred over the past week as mega-bank JP Morgan Chase broke the news of a stunning $2 billion loss in a trading debacle similar to the kind that conspired to wreak the American economy only three-and-a-half years ago.

JP Morgan — depending on how their assets are counted, either the largest or second-largest bank in the world — and its CEO Jamie Dimon reported the details of the bank’s “flawed” strategy of making risky bets on derivatives through its “Chief Investment Office,” bets that turned sour and generated an instant loss of $2 billion in bank capital.

CEO Dimon was forced to apologize for the embarrassment and explain how the nation’s largest bank that received significant public bailout funds to survive the last financial catastrophe could have engaged in risky actions nearly identical to those that sent Wall Street off a cliff in 2008.

 A massive trading bet boomeranged on J.P. Morgan Chase JPM +0.19% & Co., leaving the bank with at least $2 billion in trading losses and its chief executive, James Dimon, with a rare black eye following a long run as what some called the “King of Wall Street.

The losses stemmed from wagers gone wrong in the bank’s Chief Investment Office, which manages risk for the New York company. The Wall Street Journal reported early last month that large positions taken in that office by a trader nicknamed “the London whale” had roiled a sector of the debt markets.

The bank, betting on a continued economic recovery with a complex web of trades tied to the values of corporate bonds, was hit hard when prices moved against it starting last month, causing losses in many of its derivatives positions. The losses occurred while J.P. Morgan tried to scale back that trade.

The bank’s strategy was “flawed, complex, poorly reviewed, poorly executed and poorly monitored,” Mr. Dimon said Thursday in a hastily arranged conference call with analysts and investors after the stock-market close. He called the mistake “egregious, self-inflicted,” and said: “We will admit it, we will fix it and move on,” he said.

But despite the attempt to move attention away from his institution’s black-eye with a “nothing to see-here” mentality, the JP Morgan scandal won’t be disappearing from view anytime soon thanks to the incident spurring  renewed debate over Wall Street greed, taxpayer bailouts, and how tough government banking regulations ought to be.

Amping up the public tension over Dimon’s losses is the fact that JP Morgan received some of the highest totals of taxpayer money during the bank bailouts of 2008 and 2009. JP Morgan was given nearly $100 billion in bailout funds over the course of the TARP program, including money to purchase failing  Bear Stearns, and generated controversy by propping up its balance sheets through counting bailout cash as “profits.”

How could the nation’s largest bank lose $2 billion almost overnight? It was no accident. Only months after the financial crisis that led to JP Morgan’s massive infusion of taxpayer cash, Jamie Dimon and the bank were extensively lobbying Congress and the Obama administration to carve out specific loopholes in the new financial regulation legislation that was a response to 2008′s catastrophe.

Possessing deep ties in Washington and the most aggressive lobbying operation in the financial industry, JP Morgan  was quickly able to win concessions from lawmakers and the White House on gaping exemptions to the “Volcker Rule” that enabled the bank to carry out the risky bets in derivatives that eventually led to the $2 billion loss that has rocked the bank.

Financial experts and lawmakers immediately sounded warning signals about a trading loophole “big enough loophole that a Mack truck could drive right through it.”

Soon after lawmakers finished work on the nation’s new financial regulatory law, a team of JPMorgan Chase lobbyists descended on Washington. Their goal was to obtain special breaks that would allow banks to make big bets in their portfolios, including some of the types of trading that led to the $2 billion loss now rocking the bank. 

Several visits over months by the bank’s well-connected chief executive, Jamie Dimon, and his top aides were aimed at persuading regulators to create a loophole in the law, known as the Volcker Rule. The rule was designed by Congress to limit the very kind of proprietary trading that JPMorgan was seeking.

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 JPMorgan wasn’t the only large institution making a special plea, but it stood out because of Mr. Dimon’s prominence as a skilled Washington operator and because of his bank’s nearly unblemished record during the financial crisis.

“JPMorgan was the one that made the strongest arguments to allow hedging, and specifically to allow this type of portfolio hedging,” said a former Treasury official who was present during the Dodd-Frank debates.

Those efforts produced “a big enough loophole that a Mack truck could drive right through it,” Senator Carl Levin, the Michigan Democrat who co-wrote the legislation that led to the Volcker Rule, said Friday after the disclosure of the JPMorgan loss. 

Adding to the risk at JP Morgan was the unusual setup at the banking unit responsible for the huge trading loss. Despite repeated warnings from regulators and officials with the bank in charge of risk management, CEO Dimon allowed the “Chief Investment Office” to operate with virtually no oversight and report directly to him, an odd practice heavily criticized by experts.

JP Morgan and Dimon are now engaged in extensive damage control, seeking to mitigate the burgeoning stain upon the bank’s reputation and public image. That will be difficult given the questionable actions and comments from the bank and its CEO before and after the trading scandal surfaced.

Despite the fallout from the $2 billion loss incurred by the bank’s special investment arm yet to settle, JP Morgan executives have not yet decided whether they will seek to recoup the extensive bonuses and other compensation paid out to the officials responsible for the failed bet. While the bank may be reluctant to do so, pressure from the public, regulators and shareholders make it likely that the bank will have to initiate a “clawback” program to take back bonus money.

Also complicating the situation and adding to the damage done to JP Morgan’s public image is the history of CEO Jamie Dimon. Respected by fellow Wall Street executives and insiders, Dimon is known for many controversial statements and his impeccable  connections to leaders in Washington and on Capitol Hill.

Among the many tone deaf executives seeking to stem the public support for the “Occupy Wall Street” movement, Dimon rankled many earlier this month when he took a shot at “Occupy” and complained that Wall Street was facing “discrimination” in the wake of growing public anger at corporations and financial companies over the hundreds of billions of dollars they have received in tax cuts and bailouts.

Asked about the Occupy Wall Street movement against financial greed and economic inequality, Dimon acknowledged that the protesters have some “legitimate complaints.” He argued, however, that it’s unfair to paint all institutions with one brush: “It was everyone guilty. That’s another form of discrimination.”

He expressed optimism about his industry: “Investment banking is going to have a bright future. [...] It will always be a highly paid industry.”

“When things go wrong, finance gets blamed,” just like blaming speculators for high oil prices, Dimon said. The remark was an apparent reference to President Barack Obama’s recent call for new measures to prevent manipulation of oil markets.

And while he received $100 billion in government bailout money on behalf of JP Morgan, Dimon has publicly endorsed European-style austerity for the United States in the form of the Bowles-Simpson proposal, a plan that  offers massive cuts in government spending and would eliminate many safety net programs that working Americans rely upon.

Dimon is also a significant player in American politics, culturing especially close ties with President Obama and the president’s top aides. The JP Morgan CEO has been called Obama’s “favorite banker” and has been one of the president’s most frequent visitors to the White House, making nearly 20 trips since  Obama took office.

Jamie Dimon was once the silver-haired hero of Wall Street, scooping up failing banks during the worst of the financial crisis and avoiding the kind of toxic mortgage bonds that sent competitors into bankruptcy and pushed the American economy to the brink.

He was also one of President Barack Obama’s most prominent Wall Street friends, a rare high-profile Democrat in an industry dominated by low-tax, free-market Republicans. Dimon spent several years in Obama’s hometown of Chicago, where he ran Bank One after a nasty breakup with his one-time mentor. He got to know Rahm Emanuel. He hired Bill Daley as a top executive before Daley became Obama’s second chief of staff. He gave hundreds of thousands of dollars in contributions to Democrats.

 Obama returned all the love, at least at first. Dimon made at least 16 trips to the White House and met at least three times with Obama — a bond that allowed the president to appear business-friendly. The New York Times in 2009 called Dimon Obama’s “favorite banker.”

The president has stood by his pal in high finance, downplaying Dimon’s role in the $2 billion mess and still calling the JP Morgan head “one of the smartest bankers we’ve got.” The president failed to detail what level of investment losses would be incurred by the nation’s “dumbest” bankers.

The president’s interview with “The View” taped Monday reflects that struggle. JPMorgan “is one of the best-managed banks there is” and Dimon “is one of the smartest bankers we’ve got,” Obama said in the interview that aired Tuesday — the same day Dimon faced shareholders at JPMorgan’s annual meeting in Florida and hung onto his chairman of the board title during the biggest challenge of his tenure.

The most important element to emerge from the JP Moirgan scandal is a more robust debate over the effectiveness of government financial regulations, supposedly strengthened with the implementation of the Dodd-Frank legislation, a program touted by the administration as its signature regulatory achievement and reviled by conservatives and corporate America as stagnating government overreach.

Both descriptions of Dodd-Frank verge on the absurd, as the new law makes a mockery of the term “regulation” with such gaping loopholes as the one lobbied for by JP Morgan that eventually authored what could be its own demise.

The JP Morgan shock is clear indication that Dodd-Frank and other timid efforts by the Obama administration — fought every step by conservative lawmakers and corporate America — has done nothing to eradicate the looming threat of “too big to fail” that did so much damage not even four years ago.

But even the worthless safeguards imposed by Dodd-Frank are too much for Republicans and some Democrats in Congress, well-oiled machines groomed by corporate lobbyists eager to squeeze as many favors out of Capitol Hill as possible.

Even as the $2 billion stunner from JP Morgan was being uncovered, House Republicans were prepared to vote on legislation that would completely gut the derivatives regulations that eventually stopped JP Morgan’s risky bets once the damage had already been done. In the wake of public rage at the banks, the GOP quietly shelved their proposed vote, although not before some lawmakers dismissed the uproar over the JP Morgan incident due to the public’s “tendency to overreact.” .

 It might not be the best week to vote for less financial regulation.

Republican lawmakers put off a vote Tuesday on a set of bills that would curtail derivatives regulations, after J.P. Morgan Chase’s announcement of a $2 billion trading loss was widely seen as bolstering the argument for stricter oversight of Wall Street.

The steep trading loss on complex derivatives seemed to quiet the “banks know best” argument that critics have been making in Washington against the 2010 Dodd-Frank regulatory overhaul that mandated greater oversight of the type of trades J.P. Morgan lost money on.

Lobbyists and Capitol Hill aides predicted the news of the trading loss would have a chilling effect on efforts to roll back Dodd-Frank, at least in the short-term.

The House Agriculture Committee Chairman said he was postponing a Thursday meeting to consider three regulatory bills to “ensure there are no unintended consequences of the legislation.”

Committee Chairman Frank Lucas (R., Okla.) said the legislation the committee was set to consider had nothing to do with the trading loss at J.P. Morgan.

“As always, Washington has a tendency to overreact,” Mr. Lucas said in a statement.