Ohio Attorney General Richard Cordray has filed a lawsuit against S&P, Moody's and Fitch. The lawsuit, filed in the US District Court for the Southern District of Ohio on behalf of five Ohio public employee retirement and pension funds, charges the rating agencies with "wreaking havoc" on US financial markets by providing unjustified and inflated ratings of MBS in exchange for lucrative fees from securities issuers.

According to Cordray: "The rating agencies were central players in causing the worst economic crisis in Ohio since the Great Depression. The rating agencies assured our employee pension funds that many of these mortgage-backed securities had the highest credit ratings and the lowest risk. But they sold their professional objectivity and integrity to the highest bidder. The rating agencies' total disregard for the life's work of ordinary Ohioans caused the collapse of our housing and credit markets and is at the heart of what's wrong with Wall Street today."

The lawsuit alleges that the rating agencies improperly gave many of these investments the highest investment grade credit rating, indicating that the investments were extremely safe with a very low risk of default. According to preliminary estimates, the improper ratings cost the Ohio funds losses in excess of US$457m.

"Contrary to the representations of the rating agencies, these mortgage-backed securities were, in fact, high-risk investments that lost tremendous value as the housing market collapsed and mortgage foreclosures accelerated," explains Cordray.

The lawsuit further alleges that the rating agencies made spectacularly misleading evaluations of MBS due in part to the lucrative fees they received from the same issuers they were supposed to be objectively evaluating. Public statements and testimony indicate that rating agency executives and analysts knew their ratings of MBS were wrong, according to the suit.

The Ohio lawsuit is being brought on behalf of the Ohio Public Employees Retirement System, the State Teachers Retirement System of Ohio, the Ohio Police & Fire Pension Fund, the School Employees Retirement System of Ohio and the Ohio Public Employees Deferred Compensation Program.

"The OPERS Board of Trustees authorised filing this litigation to ensure that we can rely upon the industry credit rating agencies to give us independent, objective information when making our investment decisions in the best interests of our members," notes Cinthia Sledz, chair of the OPERS Board's Proxy Policy and Corporate Governance Committee.