Earlier quoted context omitted.
From my understanding, there also was/is a loophole that allowed squatters to hold on to a name without cost for a period. Once it rolled off, they were able to grab it again at no cost. Don't recall all of the details or whether the loophole was closed, but at one time it powered a lot of the squatting activity.
You are talking about "domain tasting". It was closed because it wasn't good for the registry operators (once again Verisign in the case of .com and .net). That said there is a cost. A registrar needs to keep money on deposit with the registries for the domains that they have purchased. So if they have a constant 1000 domains being registered and dropped and registered it will cost them money. They will make that mon…
http://en.wikipedia.org/wiki/Domain_tasting#Domain_kiting
"Domain tasting should not be confused with domain kiting, which is the process of deleting a domain name during the five-day grace period and immediately re-registering it for another five-day period. This process is repeated any number of times with the end result of having the domain registered without having to pay for it."
Apparently, there was no cost to the squatters.