In a sign of the close relationship between regulators and banks, documents released Friday show that the Federal Reserve Bank of New York knew of the rate rigging scandal as far back as 2007 and did nothing to stop it.

The scandal involves the manipulation of the London interbank offered rate, known as Libor, which is set daily in London by 18 of the world’s largest banks, and has far-ranging influences, affecting the rates of mortgages, student loans and credit cards.  By manipulating the rates, banks would have been able to appear in a healthier state.

As Rolling Stone's Matt Taibbi has noted in tracking the Libor scandal, "American officials in 2008-2009 were extremely concerned about the appearance of weakness in the financial markets, so much so that they may have resisted pursuing criminal prosecutions against big banks, and we also know that they spent a lot of time commiserating with Wall Street figures before and during the crisis."

Banking giant Barclays made waves last month when it admitted to rigging the rate.

The documents, released in response to congressional inquiries, show that the Fed knew that Libor was being rigged by banks years before it ended in 2009.  While the Fed communicated its concerns to British regulators, it did nothing in its regulatory powers to stop the practice.

"You know, LIBORs being set too low anyway," a Barclays employee told a New York Fed analyst on December 17, 2007, according to transcripts.

On 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."

This was followed by a sympathetic response from the Fed analyst: 

"You have to accept it," she says. "I understand. Despite it’s against what you would like to do. I understand completely."

As Mark Gongloff points out, the rate rigging "may have cost borrowers (when rates were manipulated higher) and state and local governments (when rates were manipulated lower) untold millions of dollars."

Reuters reports that while Barclays is so far the only bank set to pay $453 million in fines for the rate manipulation, "More than a dozen banks, including Citigroup, JPMorgan Chase & Co and Deutsche Bank, are under investigation over suspected rigging of Libor."

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Matt Taibbi on Current TV on July 6 speaking about the Libor scandal and why the American people should be outraged: