New York, Connecticut, Massachusetts, Florida and Maryland are all in various stages of investigations of the Libor interest rate fraud that grew out of Barclay’s Bank, according to the states. New York Attorney General Eric Schneiderman, who has been aggressive in prosecuting banking and investment fraud, and Connecticut AG George Jepsen are coordinating their efforts, and Massachusetts is is in talks to do the same.

“The New York and Connecticut attorneys general have been looking into these issues for over six months, and will continue to follow the facts wherever they lead,” said James Freedland, a spokesman for Schneiderman, in a July 15 an e-mail.

Here’s how the fraud worked:

The LIBOR is the average interest rate, the benchmark, for short term interest rates worldwide. It is the rate at which a LIBOR bank could borrow funds at a specific moment in time, and it affects $800 trillion worth of securities (investments). During the recent financial crisis, various major and minor banks coordinated with one another to artificially create lower interest rates to appear financially healthy. Vast sums ofmoney could be made in this way.

In the fraudulent LIBOR credit-swaps, interest rate hedges were sold to small and medium-sized businesses, and since the interest rates were negotiated Wild West-style by bank representatives, interest owed to customers or interest owed to the bank by customers was manipulated.

To put it simply, Barclay’s and the various other banks who were part of LIBOR collaborated via email to manipulate the LIBOR interest rate, defrauding its customers in the process. If bank representatives could nudge an interest rate up or down a few points they could bring in nice profits.

Since these interest rate market manipulations amount to $800 trillion in loans and securities, it is understandably a major problem, and it was only a matter of time before American states’ attorneys general launched their own investigations. The $450 million fine paid by Barclay’s to US and UK regulators is just not enough considering the depth of the fraud.

It’s important to recognize that the LIBOR scandal could be the biggest fraud ever, touching businesses both big and small, as well as households stretching over various social strata. Anyone who banks, really.

At present, Barclays plc (LON:BARC), Royal Bank of Scotland Group plc (LON:RBS),Lloyds Banking Group plc (LON:LLOY) and HSBC Holdings plc (LON:HSBA), and several more banks, including Clydesdale and Yorkshire banks, have joined the Financial Services Authority’s interest rate swap scheme.

If the LIBOR fraud is still not clear, check out the infographic below, courtesy of AccountingDegree.net.