Maybe it's only the adult Peter that no one remembers, Maybe when Walter brought Peter over from the other side, he actually did drown in in the icy pond in this "new" (or original?) time line? This way, the rip in the universes would still exist due to Walters actions, but both Peters would be dead.
What I'm suggesting is that perhaps the Watchers saved Peter from drowning precisely so he could grow up and operate the machine and create a "pocket" between universes so that an otherwise unresolvable situation could be mended? Perhaps the Watchers (First People?) built the machine precisely for this reason?
I dunno, what does everybody think?
Well, they're going to have to explain how Peter "never existed" but the rips between universes still do. If Peter "never existed" then Walter never lost his son, never brought the other Peter over, etc. If he never did that, then there shouldn't be any damage to the other universe.
But Walternate still told Walter "You destroyed my universe" (or something to that effect). So how did that happen without Peter existing?
I like your theory, especially the part which explains why the Observer interfered in Peter's drowning. Except......the Observer said "he never existed", didn't he? That's different from "he died young".
All of this is making me cross-eyed!!