It's likely incompetence, not malice. If they didn't want people using other DNS, and were willing to fuck with ip addresses they don't own to accomplish that, they'd be blackholing google's and opendns's public caching nameservers too.

It might even have been a conscious decision. Even though it's horrible and the people involved in developing the firmware need re-education. The decision probably went like this: we need an internal address to do something. We can't use 10, 172.16, or 192.168 ranges because those might conflict with internal LANs. 1.x is safe because we all know nobody uses them. The correct decision obviously would have been to get at&t corporate to commit to never using some tiny corner of their address space, and use that. Or 127.a.b.c if that works on the OS. Those options are only needed if they really need an extra IP address. They might not need one after all if they designed their firmware better.