Banks were the weakest stocks on Wall Street as investors reacted negatively to new details on the LIBOR rate-fixing scandal. Expect the taint of the scandal to spread as more details are released. Down hard on the news were JP Morgan(JPM) and Morgan Stanley(MS), -4%, and Goldman Sachs(GS), down 2.7%.

Revelations in the past few weeks suggest that Barclays(BCS) traders felt as if they were entitled to misreport LIBOR rates to cover up losing trades based on the key interest rate index. That goes right to the heart of the integrity of banks and brokerages. In a world in which we have become inured to misdeeds, this appears to be one of the worst.

Let's call it what it was: Outright fraud. Executive heads are rolling, but people should go to jail. The concern now is that Barclays was not the only group to misreport the rate and also that as investigators dig deeper, they'll find that the fraud was widespread. The charges are hard to prove, however, which is why prosecutors have gone slow so far.

Not many people realized, I suppose, that Libor -- short for London Interbank Offered Rate -- was set daily on a survey of traders, not on actual trades. That seems ridiculous, but that was the practice.

Libor is the index that sets the standard for trillions of dollars worth of mortgages around the world, including the United States, so if was set daily for months or years at levels that did not reflect true market conditions, the liability of banks that participated in the fraud could be enormous. Until investors get a handle on the size of the stain they will shoot first and ask questions later.

Plus, you can expect more regulation pushed down onto the big banks that will impair profitability. I have said for a while that in a few years we might find that banks are so regulated that they look more like utilities than anything else -- allowed to make a government-mandated margin on loans, deposits and merger transactions, and that's it. That would depress bank stocks for years if the scenario comes to pass. Bank stocks overall could easily be facing ten years of hardship.