Regarding how WaMu’s demise “looked”:
Couldn’t mini bear runs potentially occur over a period of time as a way of “gaming” the markets for short-term gains? ..in a similar way as futures can be (supposedly?) used to game stock prices? Then, after it falls enough, the fundamentals can deteriorate to the point where it will collapse on its own. As Soros states, regarding the “reflexivity” of the markets:

“Nowhere is this phenomenon more pronounced than in the case of financial institutions, whose ability to do business is so dependent on trust. A decline in their share and bond prices can increase their financing costs. That means that bear raids on financial institutions can be self-validating.”

Here is a picture of WaMu’s CDS vs. share price from approximately the date of the removal of the uptick rule:
http://www.marketoracle.co.uk/images/2008/WaMu-CDS1.png

By the time the ban on short selling was imposed (September 19, 2008), it was probably too late for something like that to work anyway.. fear had long ago set in, especially with what had happened to Bear and Lehman. Furthermore, the need to impose such a ban could signal a lack of confidence to longs, causing them to panic and sell while they still had a chance. Therefore, even if this may have helped if enacted quickly, by that point it was probably too late anyway.

I certainly agree with you that these institutions were unsound, and it was likely just a matter of time before something like this happened, and there are probably a slew of more important measures which should be made to strengthen the system.. Nonetheless, couldn’t reinstatement of the uptick rule (in some form) could be part of a package to achieve this goal?

Even Warren Buffet says that “on balance” we should probably reinstate it:
http://everythingwarrenbuffett.blogspot.com/2009/03/full-cnbc-squawk-box-transcript-video.html

“BECKY: All right, you counted on–you commented on mark-to-market. What about the uptick rule? We’ve had several people who’ve written in about that.

BUFFETT: Yeah. Yeah, I–there’s no–there’s no question that it–there’s something wrong with people buying stocks and saying untrue things, and there’s something wrong with people shorting stocks and saying untrue things. And sometimes it seems like the shorts are a little more eager to spread negative stories than the longs. But I’ve seen a lot of people on the long side do a lot of things they shouldn’t have done, too. I think–I think probably the uptick rule is a good idea. I mean, we had it for decades and the–it–on balance, I probably would have it in. I don’t think it’s the key to things at all. I mean, I think that–I mean, you can–you can do bear raids of a sort through credit defaults, swaps and all that sort of thing now, and there’ll always be people trying to push the bear case. There are people trying to push the bull case all the time. In the end, if you don’t owe money on stocks and you own a good business, a good business will not be ruined by somebody selling stock short on an uptick or otherwise. I welcome people shorting Berkshire. I mean, you know what I mean? They’re the–they’re the sure buyers later on. They have to buy someday, right?”

…So Buffett essentially seems to think that it provides more value to the markets than it takes away, while stating that a “good business” will not be ruined by short selling… Going back to the Soros piece, however, for financial institutions, unlike other businesses, there exists the possibility for declining share prices to actually affect their fundamentals, thus (potentially) even turning a “good business” bad.

http://www.sec.gov/news/press/2008/2008-211.htm

http://www.google.com/finance?chdnp=1&chdd=1&chds=1&chdv=1&chvs=maximized&chdeh=1&chdet=1223064000000&chddm=5233&q=OTC:WAMUQ&ntsp=0

While reflexivity has a nice ring to it, we must not ignore the fundamental fact that every single financial institution that went bust was fundamentally unsound; they suffered huge losses on bad investments and were highly levered. Furthermore, their funding was primarily short-term while their assets were long-term. Bear, Lehman, and WaMu suffered old-fashioned bank runs because there was legitimate fear about their solvency and their liquidity. If the government wishes to prevent such failures in the future it should increase oversight of banks and increase reserve requirements, thus attacking the root cause of the fear surrounding the banks, rather than focus on a few capital market actions that might have somewhat inflamed the fear.

“Taking these three considerations together, it’s clear that AIG, Bear Stearns, Lehman Brothers and others were destroyed by bear raids in which the shorting of stocks and buying CDS mutually amplified and reinforced each other. The unlimited shorting of stocks was made possible by the abolition of the uptick rule, which would have hindered bear raids by allowing short selling only when prices were rising.”

I think it is clear from that statement that he viewed “unlimited shorting of stocks”, which was “made possible by the abolition of the uptick rule” as an important factor in this interaction… This would have also of course triggered longs to ultimately sell as well in addition to the shorting.

http://online.wsj.com/article/SB123785310594719693.html

I have no idea if his version of the events is true or not, but I do generally agree with his theory of “reflexivity”, and what he is saying makes sense to me in that regard.

I wish the SEC understood that shorts are as a important to the reliable market efficiency as predators are to an ecosystem’s herbivore population stability. I suppose I shouldn’t be surprised since we are the same people that hunted many of North America’s large predators into near extinction.

The more the SEC makes it tough/expensive for shorts, the less meaningful price discovery there is going to be and the more excessive volatility there could be.