The stock probably does have a bigger potential upside, but also a more probable (than the bond) downside. The stock could drop quite a bit while the bond remains solvent. Bankruptcy and declining stock are not (completely) correlated positions to take. It's always a risk trade off.

Even if they don't go bankrupt, the equity has a much higher risk. The gov't could take massive warrants or preferreds etc. in exchange for needed money. That sort of dilution can be profound. Look at a 10 year chart of AIG. Yahoo chart says all time high was 1971 (by eye), currently trading at 23. Of course the stock was never actually trading at almost 2000/share, that's just the dilution factored in.

Guess who gets paid first if the company collapses.

He’s not talking about stock, and you’re right - their stock would have a far greater return. Potentially over 100% within a year.