MM's can legally naked short to make a market. You've yet to clearly explain how someone else can do so. Supposedly, the non-recourse stock loan was a method, but your explanation didn't support this. The generic scenario posted seems like a fancy borrow arrangement to me resulting in a regular short not a naked one.
You claim someone (outside of MMs) can legally naked short as a viable investment strategy. Talking in generalities shows you're spouting only theory. If you really have done this, please give some specifics. I would like to understand how it's done if there really is a hole allowing it.
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"We simply attempt to be fearful when others are greedy and to be greedy only when others are fearful."
-- Warren Buffett