So sorry to hear this, Kari
The level of detail provided by your trusted colleague suggests to me that he has been thinking and re-thinking and then re-thinking again about the entire event. A veritable hell.
I would too if it were me. Horrible, horrible situation for all involved. He had to know the narrative didn't make sense (i.e. how could the watch not be there) and if he were dishonest it would have been easy to say something about 'leaving the bag for five minutes completely unattended'. But he didn't.
At the same time, if it were me, I would also feel the only way I could make it up to you is to find as close to a suitable replacement as possible.
But as for blame...in this case, perhaps the hardest part is the person who deserves the blame is unknown.
I hope you find the watch soon.