Aha! You are correct. It seems like it was the baud rate. After changing baud rate even works with 140nf cap. It will probably work with other significantly different values too. The reset pin worked like you said also. That article was a really nice find, I would have never considered different arduinos program at different baud rates!
I have also skipped soldering to pin 32 and instead removed the resistor between pin32 and led breakout pin and connected rst pin to that. Not sure if it would work with the resistor in place. Might be useful to you if you are soldering it directly to pin 32 now...
One issue though, I am not getting serial output(Serial.print) any more, is it possible to get serial output and be able to program arduino or is it one or the other?
What are you trying to achieve with the timer btw? Cant think of functionality that you would gain, so enlighten me 