Recharged battery and wiring smoked!

[pifcat2]

My 300CE has been mostly sitting. I've been chasing a circuit that drains the battery. It started fine last week after charging the battery. I took out some of the fuses that had voltage with the key off and the battery seemed to hold a charge for a few days until a couple of days ago. I charged it overnight and when I tried to connect the cables, it would arc as if the cables were backwards. I had the key on so I removed it. It didn't arc when connecting the battery cable but then the car began to smoke soon afterwards. It may have shorted and began heating the wiring before I turned the key. White smoke billowed and I shot it with an extinguisher before removing the cable. Obviously a short apparently at the battery wiring that runs right in front of it to a junction at the bottom near the hold down bracket.

Note: the PO rewired this for a momentary starter button under the dash that works when the key is on. Some time ago I couldn't find where he tapped into the ignition wiring so I left it that way. Now that I need to repair and check the wiring, I will try again to return the ignition wiring to original.

Questions:

1. The battery measures 11.9V. How do I know it's ok?
2. Could I have overcharged the battery?
3. Any pointers finding the cause of the wiring overheating and melting the insulation?