What happens is although the flashes ARE formatted, you can't leave a bare flash. The registry HAS to be there or the update won't install. So the cfw installer first copies the existing registry to memory, formats the flashes, then writes the registry back. If you have settings in the registry that make no sense to the kernel you just updated to, it'll normally give you the BSOD that asks you to reconstruct the registry from the defaults. There are apparently some settings that look fine to the updated kernel, but are no good anymore since what they referred to is gone. The theme is a prime example. The registry will have info on the current theme, and since it's an official theme now that hasn't yet had any changes in format, updating the firmware will accept those settings after update as valid. However, the update/install erased the theme files themselves.
I'm sure there are other things that are similar. So probably most install/update guides should have the first step as "Reset settings to default, and disable all plugins". It wasn't as big a deal before, but 3.71 M33 is such a big step that it DOES make a BIG difference now.