Basically when the the attack happened, intelligence said that the attack was a riot by protesters over a youtube video, then 2 weeks later said it was a terrorist attack.
So Romney, after hearing Obama tell everyone during the debate that he told the nation on the day after the attack that it was "an act of terror", Romney jumped all over him because intelligence didnt say it was actual terrorist until 2 weeks later.
Romney wasnt wrong that Obama thought the attackers were rioters reacting to a youtube video. But he was wrong when he tried to call out the President for the actual words he spoke the day after, when he addressed the nation, because Obama did say that it was an "act of terror" regardless
I would argue that this is actually an incomplete explanation of why this made Romney look really bad.
Terrorism IS the practice of committing acts of terror. Most people people understand that.
Therefore, Obama did indeed at least allude to it being the product of terrorism. The reason Romney failed so miserably is because he went about attacking Obama the wrong way. What Romney should have done is talk about the fact that the Obama administration purposefully misdirected the public into believing that the attacks could have some kind of connection to the video while fully knowing it wasn't; it was a planned terrorist attack. This is the actual issue at hand. Not some stupid semantics bullshit, but willful misinformation along with reasons as to why security was not beefed up. I really wanted to hear an answer for that. Many arguments have been made FOR the misinformation (e.g it was a CIA base, they needed time to get the facts right, etc etc) but the issue still stands and is worthy of SERIOUS criticism.
However, Romney clearly doesn't actually give a shit about the issues, and all he cares about is pandering to morons. So instead of really hitting Bams where it hurts, he instead went for the "USA USA TERRORISTS HUR DURR YOU DIDNT SAY THE MUSLIM TERRORIST WERE RAPING OUR WOMEN YOU MUSLIM COMUFASCIST DERP" stupid zinger-fox-newsy-bullshit-line and it backfired horribly in his face.
The Libya issue should have been a guaranteed WIN for Romney, but because Romney doesn't care, he couldn't even capitalize on real issues that actually matter. It exposed Romney for who he truly is: someone who would unabashedly politicize the death of innocent Americans just to win votes. The audience hated it, which is why they clapped.