After the 1929 stock market crash, the United States government stepped in and mandated new regulations and created the Securities and Exchange Commission (SEC) in order to make sure that the stock market could not be manipulated by a select few trying to hedge their bets.

We all know history likes to repeat itself. And as certain SEC rules and regulations got phased out of practice, that's exactly what happened. Fast forward to the last 16 months or so, and you'll see institutional investors from banks like Bear Stearns and Fannie Mae start hedging their bets by short-selling their own stocks.

Short selling is borrowing stock on margin and then selling the stock in hopes that the price will fall, so the trader can buy it back at a profit. After the 1929 stock market crash, the newly-implemented Securities and Exchange Commission (SEC) required that traders borrow the shares (or show that they had reasonable access to them). What we now call, "naked" short selling is selling the stock short without actually borrowing the shares. In fact, there may be no shares available to borrow.

So what happened to all of those rules and regulations imposed after the 1929 stock market crash? Over time, they faded away until July 21, 2008 when the SEC implemented an emergency order preventing "naked" short selling of 19 financial firms.

Keeping the Shirt On Your Back

Naked short selling is the central reason why bank stocks crashed this year. In fact, the banking sector collapse began with an old decades-old practice called the "pump and dump." In short, traders would spread positive rumors about a stock, and then sell it short, right near its peak.

Because of naked short-selling, investors found themselves in a full-blown...