Updated: 7:25 a.m. ET Friday

Shares of JPMorgan Chase (JPM) were off 7% in premarket trading Friday after the company said its corporate and private equity business expected to take an $800 million after-tax loss for the second quarter.

This stemmed from a paper loss of about $2 billion resulting from a hedge of the company's entire credit position. The hedge was "flawed, complex, poorly reviewed, poorly executed and poorly monitored," CEO Jamie Dimon said on a hastily organized conference call. Dimon was often curt during the call, reflecting his embarrassment at having to disclose the problem.

The losses could rise by an additional $1 billion, Dimon said, but he hopes the problem will be resolved by the end of the year.

The announcement could depress stocks Friday. Futures trading suggests the Dow could open down 70 points.

At 7:25 a.m. ET, JPMorgan shares were down $3, or 7.3%, to $37.71 in premarket trading. They had risen 10 cents to $40.74 in regular trading Thursday.

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After hours, stocks of big banks and investment banks fell sharply as well. Bank of America (BAC) shares were down more than 2.6% to $7.50. Wells Fargo (WFC) fell by 2% to $32.53. Citigroup (C) was down 3.7% to $29.52, and Goldman Sachs (GS) shares fell by 2.4% to $103.75. Morgan Stanley (MS) was off 2.5% to $15.21.

With Thursday's close, JPMorgan's stock was up 22.5% for the year but had fallen 5.2% so far this month.

The issue threatens the reputation of Dimon as one of Wall Street's smartest executives and JPMorgan's reputation as one of the world's best-managed financial institutions. The company came through the financial crisis of 2008 and 2009 with few problems, unlike many competitors. It may result in shareholder lawsuits.

The loss came in the company's chief investment office, which makes bigger and riskier speculative bets with the bank’s money. The group makes trades to balance the bank's assets and liabilities, and its problems could weigh on the bank's broader earnings.

The company, however, would not offer a specific estimate on how earnings per share would work out. But Dimon predicts the company will still earn $4 billion in the second quarter.

While Dimon would not offer specifics on what happened, he did describe the issue as "significant mark-to-market losses in its synthetic credit portfolio." Dimon said the portfolio "has proven to be riskier, more volatile and less effective as an economic hedge than the firm previously believed." (The wording is taken from the company's 10-Q report filed Thursday with the Securities and Exchange Commission.)

Synthetic credit products are derivatives that generate gains and losses tied to credit performance without the owner's buying or selling actual debt, according to Bloomberg News.

The losses exist only on paper. They won't be realized until the trades are closed with profits and losses allocated. Another group of trades actually may produce a $1 billion profit, Dimon said.

The issue appears related to trading in the company's big London office. Apparently, Bruno Iksul, a London trader in credit default swaps, which are basically insurance policies on specific events, had sold so much protection, Bloomberg News said, that his trades have moved a number of market indexes. Iksul's activities became so well known that he was nicknamed the London Whale.

It's not clear whether Iksul is still with JPMorgan.

Dimon conceded that the problem caught the banking giant by surprise. The issue came into focus starting around March 31. But, he said, when the company makes a mistake, "We admit it. We learn from it. We fix it. And we move on."

The company has put a big team of experts on trying to figure out what happened and minimize the effects on the company's bottom line. JPMorgan has enough capital to weather the problem, Dimon told analyst. "We've got staying power."

Asked to describe how big a problem the trading error was, Dimon said, "Egregious."

JPMorgan has been considered to be one of the best-managed banking companies on Wall Street, one with good risk-management policies and strong risk controls. That makes this incident all the more embarrassing for Dimon, who acknowledged in the conference call that the bank has egg on its face. "This is not how we want to run a business," he said.

When reports of potential problems in the London office began to surface, Dimon called it "a tempest in a teapot."

But the incident is another instance of a very few employees who make a wrong move and cost their employers billions.

French banking giant Société Générale lost 4.9 billion euros ($6.4 billion U.S.) after Jerome Kerviel, a trader in the company, was found to have traded well beyond his authorized limits. Kerviel later created a series of transactions designed to cover up his activities.

Barings Bank, which had been Britain's oldest investment bank (and financier of the Louisiana Purchase), failed because of fraudulent transactions made by Nicholas Leeson, then a trader in the bank's Singapore office.

Kim Peterson contributed to this report.