Security Lending, Legitmate financial activity or a scam?

The Economist reports on the existence of a "securities lending" market  worth $1.5 trillion a year.  In the spring, right around dividend payment time, European companies and pension funds  loan some $100 billion worth of shares to tax exempt institutions.  The borrowing institutions collect the dividend, and pay the share owners a "rental" fee equal to the dividend foregone.  This dodge enables the lender to avoid paying a withholding tax due on dividends.  They don't escape taxes, they just don't have to pay them early, they can wait til they do their taxes at the end of the year.   
   Borrowing stocks is popular with short sellers like hedge funds.  Short sellers figure a stock is gonna fall, so they sell (putting downward pressure on the stock's price) and buy the stock back later when it is cheaper.  Used to be, a short seller didn't actually have to own the stock he shorted, he just sold it, and he had the normal clearing time (days) to actually deliver the stock certificate.  Stock market players and all public joint stock companies (just about all companies) hate short selling.  They got Congress to tighten up on short sellers, the short seller is supposed to actually own the stock he is shorting, before he shorts it.  Well, maybe  they don't REALLY own it, they just borrow it. 
   Then there are banks who want their asset portfolio (stocks and bonds) to look "better".  They borrow very safe bonds, and they lend out their speculative dollar stocks.  Presto, chango, a high grade portfolio to show investors, bank regulators, central banks and other suckers.  Greeks do this a lot.  Far as I am concerned its a pure scam.
   Or places like AIG, who loaned out $90 billion dollars worth of stock and used the cash so raised to play the mortgage backed security market.  When SHTF, the borrowers of AIG's stock all returned the stock and demanded their money back.  AIG had already lost the money playing the market and the US taxpayer had to pay off $90 billion to the borrowers.
   None of this sounds like legitimate financial activity to me.  But the Economist  worries in print that bad things will happen if governments crack down on it.