Al said:
As for not nerfing it, I would say that it is quite the contrary. Due to fixed DCs, by the mid- to high- levels, Diplomacy unqualified becomes very overpowered. A 10th level bard with maxed Diplomacy, Charisma 16 and +4 synergy bonuses from Bluff and Sense Motive can take 10 (Skill Mastery) and automatically avoid combat (Hostile becomes Indifferent), convince skeptics (Unfriendly becomes Friendly) and gain help from any random passer-by (Indifferent+ becomes Helpful). This is all for just a fraction of his skill points.
Skill Mastery is a Rogue Special Ability. Bards can't take it.
Change the description to Rogue and maybe reduce the Charisma a little bit. Then your example works.