The US justice department is preparing a criminal case against major banks and individuals over international interest rate manipulation, the New York Times reported.
The "Libor" scandal so far has been most acute in London, with public outcry that regulation in Britain was lax. But concern has grown about the wider impact on consumers and the involvement of US regulators.
But public and political pressure is also building across the Atlantic. Saturday's report of a likely US criminal actions comes as private US investors prepare suits and the Commodity Futures Trading Commission carries out a far-reaching regulatory inquiry.
Barclays alerted US regulators as far back as 2007 to concerns that banks were rigging benchmark interest rates, according to documents released on Friday, but policymakers on both sides of the Atlantic did not appear to take decisive action, underscoring the chaos of the financial crisis.
The Federal Reserve Bank of New York was pushed to release the documents amid a furor that was touched off when Barclays late last month agreed to pay $453mn in fines for attempting to manipulate Libor.
Libor, or the London interbank offered rate, is calculated daily in London when panels of banks submit estimates of how much it costs them to borrow. It is a major index that helps judge the health of banks and influences rates from mortgages to student loans to credit cards.
Since Barclays' settlement, US and UK lawmakers have demanded to know whether regulators were aware of Libor rigging and what they did about it.
The documents released by the New York Fed and other regulators late Thursday and on Friday paint a picture of banks desperate to under-report their borrowing rates in order to appear stronger, and of regulators aware of a broken system but overwhelmed by the financial crisis.
"You know, LIBORs being set too low anyway," a Barclays employee told a New York Fed analyst on December 17, 2007, according to a transcript of the phone call.
In a similar conversation dated April 11, 2008, a Barclays employee told another Fed analyst: "[W]e just fit in with the rest of the crowd, if you like ... We know that we're not posting um, an honest Libor."
The employee said Barclays was under-reporting its borrowing costs, and believed other banks were doing the same, according to the New York Fed.
The document trove also showed communications between US and UK regulators acknowledging weaknesses in how Libor is set.
US Treasury Secretary Timothy Geithner, then head of the New York Fed, sent an email to Bank of England Governor Mervyn King in June 2008, recommending six ways to enhance the credibility of Libor.
It said the measures were needed "to prevent accidental or deliberate misreporting".
The BoE passed on Geithner's thoughts in an email to the British Bankers Association (BBA) - the banking group responsible for Libor - which at that stage had already decided to launch a review of the rate.
"Both the Bank and the Federal Reserve were assured by the BBA that it would take on board the recommendations, either through actions or through questions on which it would consult," the BoE said in a news release.
While some tweaks have been made to how Libor is set, the more dramatic reform suggestions have not been implemented.
Karen Petrou, managing partner of Washington-based Federal Financial Analytics, said it is unclear what more regulators could have immediately done to halt any manipulation, without causing major market disruptions.
"In retrospect, could the Fed have intervened to bar use of Libor in the United States? Maybe. Were there are other steps that could have been taken within the Fed's jurisdiction? Perhaps," Petrou said.
"But the markets were so unbelievably disrupted at the time that any steps to alter financial market indices strictly within the US would have been at the very least, even more disruptive."
More than a dozen banks, including Citigroup, JPMorgan Chase & Co and Deutsche Bank, are under investigation over suspected rigging of Libor.
Barclays is the only bank so far to admit any wrongdoing in giving false information as part of the complex process of setting the interest-rate benchmark, but the documents released on Friday indicate the practice may have been widespread during the financial crisis.
After the conversation with the Barclays employee on April 11, 2008, the Fed bank's Markets Group reported on the questions that had been raised about the accuracy of Libor.
The briefing memo was circulated to top officials at the New York Fed, the Federal Reserve Board of Governors, and the Treasury Department.
The memo hinted at a widespread problem.
"Our contacts at LIBOR contributing banks have indicated a tendency to under-report actual borrowing costs when reporting to the BBA in order to limit the potential for speculation about the institutions' liquidity problems," the memo said.
April 2008 was just months before the peak of the financial crisis. A lack of liquidity in financial markets was putting upward pressure on bank borrowing costs, and central banks, including the Fed, acted to ensure commercial banks had ample liquidity.
Richmond Fed President Jeffrey Lacker said in an interview with the Reuters news agency on Friday that the debacle is feeding public anger toward the banks.
"The revelations broadly are another episode that is damaging to people's confidence in the financial services industry and that's a shame," he said.
The New York Fed released the documents on Friday after Republican US Representative Randy Neugebauer requested transcripts related to such conversations between the Fed bank and Barclays.
"We're reviewing the documents now, and once we've thoroughly examined them, we'll decide how to proceed," Neugebauer said in a statement. "We'll continue looking into this matter to determine who was involved in this practice and whether it could have been prevented by regulators."
A group of US senators increased pressure on investigators and regulators on Thursday, asking for a vigorous probe into allegations that US and foreign bank regulators were aware for years of wrongdoing in the setting of Libor.
US state attorneys general are also jumping into the widening scandal, a move that could open a new front against the top global banks.
Since the height of the financial crisis, some small changes have been made to how Libor is set.
The BBA in a November 2008 policy paper proposed changes that were later implemented to improve the way Libor is managed that contained disciplinary procedures, and better scrutiny of the data collected for setting the rate.
The committee overseeing the rate was reorganised, and a full-time manager was appointed to supervise the way Libor is calculated and disseminated to the market, according to information provided by the BBA.