No, it's not broken. See the page you linked about "privileges: set bounties":
The reputation you're using for the bounty is immediately and irreversibly deducted from your reputation.
The user must have had 121 reputation. The minute he placed the bounty, it dropped to 21.
Note that the bounty points are forfeited whether you award the bounty or not....
I'm the moderator who handled your flag about this. I've had another look, but my conclusion is the same as what I replied to your flag: I see no evidence of abuse here.
First, see the detailed description of the bounty system. It's designed to fairly directly avoid abuse. Most notably:
the entire point of the bounty system is to draw attention to the ...