In this world of market turbulence, and lack of week to week or even day to day predictability in the market (as if we ever had predictability), the Feds step in and try to engineer the market for entities selling what they do not own. As a capitalist, you might say, "Hey, if someone can sell something they don't own, and someone is willing to buy it, then why should I care?" Good question.
The answer is, "I've got this bridge I'm trying to unload". It spans the East River between Brooklyn and Manhattan. Lets agree upon a price, and execute the contract. However, between execution and settlement, I have to go out and really buy that so I can deliver it to you. That works when you can make a market or the market is liquid - which is not always the case with bridges. It works great when the market (say for a stock) is heading south. It brings up the volumes and makes the market even more liquid. The problem is that is is self perpetuating.
This Forbes article explains it more detail and how it has impacted Bank stocks, Fannie/Freddie and your pocketbook even if you don't own the sector.
Commentary: Shortsighted Naked-Short Solution
http://www.forbes.com/2008/07/24/sec-shorting-regulation-biz-cz_rl_0726croesus.html?feed=rss_news
