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Cox envy! Larry Kudlow (CNBC’s Kudlow & Company) was even bolder than I tonight in describing today’s House Financial Services Committee hearing that hosted SEC Chairman Christopher Cox and New York Federal Reserve Bank President Timothy Geithner. Geithner continued Treasury Secretary Hank Paulson’s mantra that the Fed needs to regulate anyone that has access to the discount window. Cox said hold on cowboy; the Fed is not going to take over the world.

Geithner explained that the Fed needs deep information about any financial institutions that the Fed will have to save. Such information can only be obtained by being the chief regulator. Constant monitoring is the only way the Fed can act quickly and safely to head off systemic risk in a financial emergency. Additionally, the Fed needs to monitor the money it lends to financial institutions, from the discount window or any other form.

Cox and Geithner disagree on which regulator should supervise the liquidation of failed investment banks. Cox believes the SEC should handle the orderly liquidation of any non-depositary institution. Naturally, Geithner would like to extend the Fed in this direction.

Cox coined Paulson’s Blueprint for regulatory reform as “big think” and wants to focus on the near term. He clearly disagreed with a smaller or even nonexistent role for the SEC. Cox said that he did not support Paulson’s Blueprint and that each regulator, including the Fed, had their own opinions. Cox is now challenging the most powerful man in financial Washington. He is far bolder than the subservient Federal Reserve Chairman Bernanke.

Cox admitted that he was pressured by the Treasury and Fed to protect the primary dealers, and Fannie Mae (FNM) and Freddie Mac (FRE) from abusive naked short selling. Under questioning, he said that the protection would be extended to all stocks in the future, but did not see any problems now. Cox wanted instead to bring enforcement actions against those intentionally spreading false rumors. I guess unintentionally spreading false rumors is OK.

Cox further expressed concern that investment banks would give up access to the Fed if access entailed being regulated as commercial banks. He warned that innovation would stop under the Fed’s watchful eyes. As the Fed is assuming more power, the investment banks are shying away from its offerings. Jamie Dimon, JP Morgan’s (JPM) CEO was right; if you grab the cookies you are going to get spanked. Cox says the investment banks are saying “no thanks” to the Fed’s cookies.

Kudlow ranted that Cox was envious of the power that comes with the Fed’s discount window. I believe it’s more that the balance of power has shifted too far away from the sleepy SEC. And when the SEC finally woke up, it found itself robbed and violated.

Disclosure: Author is long FNM, FRE and JPM.