The other world (the one where the short sellers are fine) is this:
Hedge Fund A owns a real share and lends it to Hedge Fund 1. Hedge Fund 1 sells it to Fund B. Now Fund A owns a synthetic share, Fund B owns a real share, and Fund 1 is short a share.
Fund B lends the share it just bought to Fund 2. Fund 2 turns around and sells it to Fund C. Now Fund A and Fund B both own 1 synthetic long share each and Fund C owns a real share. Fund 1 and Fund 2 are both short a share.
Fund C lends the share to Fund 3, who sells it to Fund D. Now Funds A-C all own 1 synthetic long, Fund D owns a real long, and Funds 1-3 are all short a share. The overall net is still +1 long share.
This happens 25 times. Now Funds A-Y all own a synthetic share, Fund Z owns a real share, and Funds 1-25 are all short a share.
At this point, the reported short interest is 2,500% since there are 25 short shares and a single real long share. However, there are also 25 synthetic long shares.
Fund A demands the return of its share from Fund 1, excited about triggering the MOASS. Can Fund 1 return it? They can, as long as they can convince any one of Funds B-Z to sell them a share.
With the return of the share, the synthetic long share held by Fund A and the short share that was the obligation of Fund 1 have now been offset and canceled. Fund A still holds one long share, which could be the real share formerly held by Fund Z or one of the synthetic shares from Funds B-Y. If it's the real share, Fund 1 cannot make any more demands for the return of it share.
Supposing, however, that Fund 1 repaid Fund A by acquiring one of the 24 synthetic shares held by B-Y and not the real share held by Z, Fund A still holds a synthetic share. But it is a different synthetic share, which was written by one of Funds 2-25 rather then Fund 1. So Fund A tries again to trigger to the MOASS, and demands that fund return its share.
Yet again, their counterparty is able to return the share as long as they can buy it from one of the 24 remaining funds (other than A) that own either a synthetic or a real share.
A can keep trying, but as long as the other funds do not expect a squeeze to occur, they keep on selling and all A achieves is to eventually get its real share back, with no squeeze.
What you want for a short squeeze is not long chains of synthetics, but naked short selling and naked call writing.
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