For one, setTimeout is pretty run of the mill. If you haven't come across a situation where you need to wait a period of time before initiating some event, you simply haven't coded much. If someone else had just nailed the question in the interview before him than—hoop or not—they've proven a skill he hasn't.
Even if we ignore this, the "What Really Happened" area sounds like he only admitted he doesn't know, and worse, that he doesn't know how to proceed. Another comment above asks if one small set back is really a deal breaker, but in my opinion, not attempting to overcome a problem you haven't seen before shows more about a candidate's abilities than simple knowledge. Prove you can find a solution when all you have is a basic idea of the problem. Take a hint and run with it. (The interviewer gave the method name as a hint!) Google the answer.
This post hints that the position was closer to entry level, so I would suspect that curiosity and autonomous problem solving are fundamental requirements for the role. When you're green a lot is going to be brand new, so you have to be able to learn on the spot and run with it.