Today President Obama announced his intent to nominate Rep. Mel Watt (D-NC) to head the Federal Housing Finance Authority (FHFA), the regulatory agency that regulates Fannie Mae and Freddie Mac.

In the mid 2000s Fannie, Freddie, and their hordes of lobbyists were able to delay GSE reform legislation until it was too late to do any preventive good. Despite the efforts of President Bush to push aggressive reforms for several years prior, legislation was enacted only in July 2008 as the firms were in the process of imploding. Congress allowed the barn doors to be closed only after the horses had escaped.

For GSE reformers the most important vote was on a bipartisan May 2007 House floor amendment by Rep. Randy Neugebauer (R-TX) and Rep. Melissa Bean (D-IL).

At the time Fannie and Freddie held portfolios of mortgage-backed financial assets of about $700 billion (each!) GSE reformers were afraid that these large hedge funds within the firms were carrying too much risk and had little to do with the core mission for which Fannie and Freddie were created. Because Fannie and Freddie (a) were so big, (b) held such huge portfolios with poorly-understood risk; and (c) were interconnected with so many other financial firms large and small, reformers feared they posed too much risk to the financial system.

The House Financial Services Committee reported a bill to strengthen the GSE regulatory agency (and to rename it as FHFA). The bill reported by committee would have given the new strengthened FHFA head the authority to limit the GSEs’ portfolios. He would be required to consider “any potential risks posed by the nature of the portfolio holdings.” This language is critical because it includes any risks posed by the portfolios to the rest of the financial system.

The Neugebauer-Bean amendment simply inserted three words.  The regulator would be required to consider:

any potential risks to the enterprises posed by the nature of the holdings.

Before Neugebauer-Bean passed, the regulator would have been required to consider the risks these two firms’ multi-hundred billion dollar portfolios posed to the financial system. After it passed, he had to consider only whether these portfolios caused risks to the firms. A weak or captured regulator could, if he wanted, ignore the risks posed to the global financial system by $1.4 trillion of housing finance assets held by these two firms.

I continue to hold the view prevalent at the time, that the Neugebauer-Bean amendment was offered at the behest of those two firms, which were engaged in a decades-long campaign to weaken the authority of their regulator.

This amendment passed the House on a huge vote: 383-36. Blame here is solidly bipartisan: House Democrats voted 221-3 in favor, and House Republicans voted 162-33 in favor. Such was the pre-collapse political power of Fannie Mae and Freddie Mac. Kudos to the 36 brave members who stood up to Fannie and Freddie and voted for strong regulatory oversight. These members cast an unpopular vote that was later borne out by the facts.

There are few floor votes that can be linked directly to the financial crisis. Members who voted aye on Neugebauer-Bean contributed to the crisis, members who voted no deserve credit for trying to limit this one contributing factor to systemic risk. Along with most of his colleagues, Mr. Watt voted aye, to weaken the authority of the regulatory position for which he will now be nominated.

We know how this movie ends. Fannie and Freddie collapsed and were placed into conservatorship by then-FHFA Director James Lockhart in September 2008. These two firms were the first dominos to fall that month.

No member of Congress who voted in May 2007 with Fannie and Freddie and against a stronger FHFA regulator should head that agency now. That includes Mr. Watt.

I am not one of those who argue that Fannie and Freddie were the sole cause of the 2008 crisis, or even the most important cause. They were, however, contributors to that crisis in many ways. The man the President wants to lead FHFA voted in May 2007 to weaken that regulatory agency’s responsibility.

By nominating Mr. Watt the President signals a return to the pre-crisis philosophy of regulating housing finance risk.  That is a huge mistake.  Mr. Watt should not be confirmed to head the FHFA.