The immediate trouble that I have with that is that when Josephus meant Selucidae, he said Selucidae (as is recorded several other times in his work). Furthermore, if one grants your "irony" hypothesis, you still run into the same trouble with the Epistles of Peter -- if one historian (Josephus) could refer to a Jewish presence in "Babylon" and expect that his audience would understand that he was speaking of Selucidae or Mesopotamia in general, then how would we be able to say with confidence that Peter (if preaching in Mesopotamia at the time) did not employ a similar metaphor?
That said, I think you make a reasonable argument against the literal Babylon -- one which causes me to lean even more strongly towards the "Babylon" elsewhere mentioned in the New Testament -- i.e., Jerusalem.
It is interesting that Jerusalem experienced an earthquake, and three factions, as did the city of Babylon. I don't buy the assertion that hail meant that people were throwing stones at them, however. And of course you knowthat those events aren't juxtaposed like that in Josephus' writings, so it is hardly conclusive. On the other hand, there are many dissimilarities between Jerusalem and Babylon. You're the first Protestant I've ever heard suggest that. (And frankly, I'm rather relieved you don't buy the argument that Rome is the whore Babylon!) The largest problem against the assertion that Jerusalem = Babylon is that there's no metaphorical meaning; the Christians in Asia minor would have no reason to feel oppressed by Jerusalem; it was hardly the capital of an empire; and no-one would be in exile *in* Jerusalem, or *from* Jersualem. Again, Babylon = exile.
Yeah, I don't buy that "Rome = whore Babylon". Frankly, the references in Josephus to events of the Jewish Wars, and specifically in and around Jerusalem, which fulfill the prophecies of Revelation (up to about chapter 19) could be multiplied; I could do a whole thread on that subject alone (probably will, at some point).
To be blunt, I don't know why there's even any doubt on the matter -- Apostle John tells us specifically that the "Great City" (Revelation 11:8, 18:10) is Jerusalem (which is also identified with "Egypt", although it wasn't holding the Christians of Asia Minor captive, either -- "Egypt" and "Babylon" here have to do with implacable hostility towards God, not captivity or exile).
So, knowing that the New Testament specifically identifies "metaphorical Babylon" as Jerusalem, if we throw out the literal Babylon, we're left with Peter's authorship of his Epistles at metaphorical "Babylon" -- that is, Jerusalem.
Which, now that I think about it, gives a deeper flavor to 1 Peter 4:12-17; the "fiery trial" was indeed about to engulf Jerusalem and the surrounding regions; the literal "house of God" (Jerusalem Temple) was about to be destroyed, providing a warning to the metaphorical "house of God" (Christendom in general) as to God's judgment upon covenant-breakers.... hmmm.
Knowing that Peter wrote the Epistles towards the end of his life, and that he wrote from "Babylon" (i.e., Jerusalem), I'm not surprised that the burial cave of Simon bar-Jona was discovered in-country.
Meet # 2, as I don't either!