Levine is such fun to read! The solution to the problem he ends up with seems pretty easy to me - this is just counterparty risk: When you lend your shares (o

Levine is such fun to read! The solution to the problem he ends up with seems pretty easy to me - this is just counterparty risk: When you lend your shares (or let them be lent on on your behalf) there are counterparty risks. You charge interest and accept collateral as compensation for these risks. Usually these risks are gone after the shares are returned or the position closed and settled out - but not always. Tracking down the short and making him cough up the extra $2.74 is the broker's job. If the broker can't find him, then if it was a case of a normal margin account the broker is on the hook. If it was a case of the client directly accessing the stock lending market then the broker is probably (fine print time!) not liable for the counterparty failure.