They should not short some more, but guess what..the Hedge Shorts are so deep in the red that they figure to raise the stakes even more. If their brokers are stupid enough to increase their margin, why not take the gamble??
They are willing to spend what's left of resources on "extra bashers all over the messageboards, more bash-blogs, more short positions", but will not face the music and cover. It's a delay tactic. If on every down day, they can grab call options cheap, then when the sp climbs, so does the call and they can flip the call before it expires and make good profit. The problem is that down days are becoming harder and harder to come by. Because of that they will eventually have to cover.
The brokers that granted more "margins" to HEDGE Funds, who are now deep in the red, are just as guilty as the fund managesr who got blindsighted by their greed and were willing to gamble it all.
When the time comes, the broker will liquidate Hedge Funds Holdings to pay for the shares that they will buy at market price with which to cover short positions; or if they are really lucky, they will convince a fund manager who has millions of rimm shares, to sell them.
However, there is a possibility that many of these Hedge Funds are so over extended that their holdings are "marginalized" to the max; so even if all holdings are sold, the broker ends up holding the bag; the cost of the trade becomes a loss for the broker and the Hedge Fund goes under; not before the SEC is knocking at the door.
Then there is the other scenario similar to the last one in which even the broker is over extended, thus the broker is unable to buy shares on the market to cover the position of its client, the Hedge Fund, who is also over extended, over exposed and deep in the red, and late to cover, on the short side.
For those brokers, it means "hell to the 7th degree".
For the Hedge Fund, it's going under.
For The SEC, it's a nightmare, because the system is out of balance; remains out of balance until the short positions are covered.
I do not know what mechanism is in place to offset a situation where overextended shorts can not cover and neither can their brokers.
In any case, once a brokerage firm is short-maxed out, then no new short positions will pop up from them, that's for sure.