It was because there wasn't many heels in WWE really in 1995 once Shawn Michaels turned face and WWE wanted to build some new ones although in hindsight King Mabel wasn't and was never going to be the way forward. Look at the roster back then and you can see WWE had Shawn Michaels, Bret Hart, The Undertaker, Diesel and Razor Ramon all as faces whilst the only heels were Sid Vicious whilst he was around, Owen Hart, Yokozuna, Tatanka and IRS.
Rather than trying to elevate a completely useless nobody like Mabel, they should've turned Razor Ramon into a heel again. Or, Bam Bam Bigelow - he was convincing, talented and was a really strong heel.
Diesel was the champion and Vince wanted a big guy as a believable threat.
Yeah, Mabel winning the KOTR was a questionable move. I wonder if Mabel was a last minute win as Razor Ramon had a rib injury at the time and could have been a believable King.
The plan from what I understand was for Mabel to get one of the greatest rubs in WWF history by defeating three of their biggest stars in one night: Undertaker, Michaels, and Ramon so unfortunately, The Bad Guy would've been jobbed out in the finals again.
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His push really shows how out of touch Vince was at that point. He wanted to recreate a big monster heel like Yokozuna and King Kong Bundy, but the fans were sick of it. Not to mention Diesel was drawing really badly as the WWF Champ and was obviously a very limited worker so this was destined to fail. They should have done HBK as the KOTR winner and then Diesel/HBK resulting in an HBK win. Or turn Ramon, I don't care. Anything would have been better than this.
As people have said, there were too many faces in that time. Stupid booking, if you're asking me.
As for Mabel, well, they needed someone to make it look like Diesel is going to lose. That's why Nash sucked as a champion. He can't be the underdog. He's Kevin Freakin' Nash! A heel run with the belt would've worked.
Also, Mabel said that he knew in January that he will be the king.