I am not arguing that it's not as simple as the 500 calorie deficit going 100% towards fat reduction, but I don't see how it is possible to not lose weight like this. Weather or not the exercise builds muscle, it will reduce mass.
So you're saying "you're fat, that's your problem, you should just eat less." The issue is that eating less causes its own problems, and for some people those can seriously outweigh the benefits of being thinner. For some people, their ability to metabolize fat is so retarded that what you suggest really isn't feasible. They will likely starve to death before they get rid of their fat.
These people are, of course, rare, but the same issue exists in lesser values for other segments of the population.
You can gain or lose 25 pounds next month easily and without any ill effects of any kind. Try it.
I would like to see any sort of evidence that it is possible for some people to have very little ability to metabolize fat. I think the body type argument is a rounding error when it comes to obesity.
Visit Asia. There are incredibly few obese people, and most people are probably too thin. Why? Caloric intake and expenditure.
I am not a doctor, but I'd still be willing to wager that the health benefits of going on a diet/exercise regimen, thus losing weight, FAR outweigh any potential downsides to dieting. Seriously, how can you say "oh, overweight people might be harmed by diet restrictions and exercise" when for 99% of the cases out there this simply isn't the case?
There is no way to lose weight besides caloric intake being less than caloric expenditure. By saying "you are making yourself weaker and more vulnerable to disease" you are effectively saying (though probably not meaning) "you should not slim down". Trying to drop 25 pounds in a week is pretty insane, but a well balanced 1-2 year plan, approved by a doctor, will go a long ways towards health and not against it.
The linked article specifically talked about a case where the woman's doctor told her there are genetic reasons for her obesity.
Also, there is a limit to where losing weight is an unquestionably good idea. I certainly have enough excess body fat that no one wants to see my bare chest. That said, I'm not clinically speaking overweight, and I have very low blood pressure, and I'm fairly active. I certainly would benefit from cardio (as would most people) but focusing on fat rather misses the point, which is primarily keeping arteries clean and your heart strong. This is actually quite possible for an obese person.
In short, the way to lose weight is by burning more calories then you consume. But the difficult part is finding out how to do so in a healthy and sustainable weight. The means for doing so will vary from individual to individual.