For expansion drafts, they should have to follow the same rules as they do for MVP selection: i.e. you can only select players from New York teams.
From what I'm understanding, TFC was planning on trading Bloom anyway. And the cash that they gave away as part of the deal was essentially that cash the league gives teams that lose players in the expansion draft. So TFC ended up losing a player that they were going to trade away anyway and lost cash that they really didn't have in the first place.
one of those "smart" moves for both sides......TFC, as you point out, is not really worse off....Atlanta, by picking Irwin, end up with the player they were most likely to take from TFC and get the allocation money that was originally going to TFC for the pick. Probably the team "hurt" by this is Minnesota, all accounts had them interested in taking Irwin....by not taking him sooner (likely because they figured Atlanta was sorted out in net) they lost the chance to have him.