To me it reads like the execs at Amazon told the feds about some capability they were excited about, and the government officials either didn't understand it fully or overreacted to some small feature, panicked and went to ban it.

Amazon has a ton of internal politics just like any other large organization. It's entirely possible there's a faction that is trying to kneecap another faction within Amazon with this.

I agree! The concerns must have been very serious indeed to overcome Amazon's strong incentives to not bring them up and let Anthropic keep pulling in the revenue from their new frontier model.