It's a line of argument that has fallen flat with some lawmakers and investors, who want to know why Bernanke and other key U.S. regulators did not do more to end a potentially criminal rigging of interest rates affecting trillions of dollars in financial contracts.

Bernanke said last week he had been largely unable to directly address problems with Libor, or the London interbank offered rate, which he said he learned of in 2008.

"We are and need to continue advocating for reforms to the Libor process. It is constructed by a private organization in the UK, and so our direct ability to influence that is limited," Bernanke said in congressional testimony.

Timothy Geithner, who oversaw Wall Street as president of the New York Fed for five years before he became Treasury Secretary in 2009, has delivered much the same message.

He told lawmakers this week that he informed regulators "early on" about the problems and made recommendations to the Bank of England on how to reform the system.

"Seriously? They did all that they could do? I mean, come on," said Alan De Rose, managing director of government and trading finance at Oppenheimer in New York.

"Answers like those, they strain credibility," said De Rose, formerly a trader at a U.S. primary dealer, the selected large banks that do business directly with the Fed.

Legislators are similarly skeptical, at a time when the Fed is already taking heat in Congress for its regulatory failings that contributed to the financial crisis.

Republican Congressman Scott Garrett took aim at Geithner at a hearing of the House of Representatives' Financial Services Committee on Wednesday.

"You have been before this committee countless numbers of times since 2008 and if this is the crime of the century, as so many people are reporting today, never once did you ever once come and mention it as being a problem, never once did you come here and say this is what you're going to do about it," he said.

The revelations about Libor have further dented public confidence in the financial industry, which has been battered by a string of crises that led to unpopular taxpayer bailouts in many advanced economies. It is also another blow to the standing of regulators who have been widely accused of being asleep at the switch in the run-up to the financial crisis of 2008-2009.

Geithner told lawmakers this week he contacted the appropriate regulatory authorities, including the Bank of England, quickly after being informed that there were suspicions about the veracity of rates being reported by banks.

"We, at least I, first learned about those concerns in the early parts of spring of 2008 and we acted very quickly at that stage," Geithner said. "We took a very careful look at these concerns, we thought those concerns were justified."

The Federal Reserve Board, the New York Fed and the Treasury all declined to comment for this article.

Policymakers had a lot on their plate in 2008 as the global financial system was at risk of melting down.

JAY-WALKING OR HIGHWAY ROBBERY?

As well as wondering why U.S. regulators failed to follow up with the British authorities after no immediate corrective steps were taken, lawmakers noted the Fed itself continued to use Libor as a benchmark in its emergency lending programs, including the controversial bailout of failed insurer AIG.

"It appears that the early response was to keep using it, which means it appears that you treated it as almost a curiosity or something akin to jay-walking instead of highway robbery," Republican Congressman Jeb Hensarling told Geithner this week.

Robert Shapiro, a former undersecretary of the U.S. Commerce Department who now runs Sonecon, an advisory firm in Washington, says the scandal is vast and will continue to grow.

"Barclays is not some lone, bad apple. This could well turn into the largest consumer fraud ever seen," Shapiro said.

Barclays last month admitted to giving false information as part of setting the interest rate in a record $453 million settlement with U.S. and UK authorities.

Dozens of big banks, including JPMorgan Chase & Co, are under investigation. An internal probe at Deutsche Bank found two former traders may have been involved in colluding to manipulate global benchmark interest rates but suggested top managers were unaware of the fraud.

Things could get more embarrassing for U.S. regulators. The House Financial Services Committee has asked the New York Fed for all communications going back to August 2007 with the banks that helped set Libor.

The first trove of documents from the New York Fed showed Barclays had flagged concerns as early as 2007 and Geithner sent the email to Bank of England governor Mervyn King in June 2008 with the Libor recommendations.

Still, analysts do not see immediate repercussions for Bernanke and Geithner other than the risk of an additional loss of public confidence.

Dean Baker, co-director of the Center for Economic and Policy Research, a liberal think tank in Washington, says the comments from Bernanke stretch credulity, particularly after the Fed fought hard to keep regulatory power over banks in post-financial crisis reforms.

"He is insulting his audience to say there was nothing they could do," Baker said. "That is complete nonsense. If he had called up King and said that he has to fix the Libor, and if he doesn't this all goes public, then King would have no choice."

"I think this is a case of the central bankers being a good old boys club and that would be considered rude behavior. Rather than break the rules of the club, Bernanke allowed this fraud to continue, violating his responsibilities as Fed chair."

The apparently mild nature of Geithner's warnings about Libor to the Bank of England allowed King to claim he was never informed of accusations of fraud at all, critics say.

Simon Johnson, a former chief economist at the International Monetary Fund, lambasted the Fed.

"The Federal Reserve is responsible for the 'safety and soundness' of the financial system in the United States," said Johnson, now a professor at the MIT Sloan School of Management.

"Does allowing suspicions of fraud to continue unchecked at the heart of this system help to sustain the credibility and legitimacy of markets? Surely not."

(Editing by Andrea Ricci)

• A Permanent Economic Emergency