Good points - provided references are shit, simply because they can be gamed. If you work for me and I dislike you but don't have the courage to pull out the fire hammer, I can give you a great reference. If I really like you because you're extremely good (and make me look good), I can give you a horrible reference and hold onto you.

However, OP was talking about internal references. This would be a situation where I work at Company A, but I know you and trust your work. Therefore, I refer you to Company A, big up you a little and suggest that they pursue hiring you.

The difference is that if you suck, it reflects poorly on me (and quite likely kills my dreams of upward mobility). Normal provides references don't have the same motive to be truthful!

What? Is this just conjecture? If you give a bad reference to an employee you are directly putting you and the company in harm's way in terms of litigation. Usually, you just don't give a reference other than confirming tenure existence and duration if you won't go into positive detail.

That's a textbook answer, but in actual practice, the probability of litigation is extremely low.