CNN Money is reporting Ohio builds a case against the ratings companies.

Ohio’s attorney general [Marc Dann] is investigating the role that credit-rating agencies like Moody’s played in rubberstamping dicey bonds, report Fortune’s Katie Benner and Adam Lashinsky.

Ohio has the third-largest group of public pensions in the United States, and they’ve got exposure: The Ohio Police & Fire Pension Fund has nearly 7 percent of its portfolio in mortgage- and asset-backed obligations.

Moody’s says that Dann’s accusations are nonsense. “We perform a very significant but extremely limited role in the credit markets. We issue reasoned, forward-looking opinions about credit risk,” says Fran Laserson, vice president of corporate communications at Moody’s. “Our opinions are objective and not tied to any recommendations to buy and sell.”

Dann and a growing legion of critics contend that the agencies dropped the ball by issuing investment-grade ratings on securities backed by subprime mortgages they should have known were shaky. To his mind, the seemingly cozy relationship between ratings agencies and investment banks like Bear Stearns only heightens the appearance of impropriety. In addition to receiving fees from bond issuers that want ratings, S&P;, Moody’s, and Fitch do not vet data provided by these customers – information the agencies use to make their credit assessments. It’s a bit like a take-home final. Or as Moody’s puts it in its own code of conduct, “Moody’s has no obligation to perform, and does not perform, due diligence.” The other two agencies have similar provisions.

Moody’s and its cohorts might have some wiggle room. “The agencies are on fairly strong ground that their ratings are just opinions, but that doesn’t absolve them from liability risk,” says Steve Thel, a securities law professor at Fordham University.

Here’s honesty for you: “Moody’s has no obligation to perform, and does not perform, due diligence.” Starting with “does not perform, due diligence” I doubt that truer words were ever spoken. A lawsuit will likely decide whether or not Moody’s has an obligation.

Implode-O-Meter Sued

I am saddened by the following news but I knew it was coming someday. Aaron Krowne sent me a private email today about this public posting: Loan Center of California Sues Mortgage Lender Implode-O-Meter; Motion to Strike Filed.

I wish the best of luck to Implode-O-Meter in this unfounded lawsuit.

Stupidity Rules in Alaska

One might think that all these subprime and hedge fund blowups would practically wakeup the dead, but I see that is not the case in Alaska where there is a debate over pension funding.

Alaska state lawmakers are at odds over a proposal to borrow money at a low-interest rate, invest the money for a higher return and use the difference to help offset the state’s pension fund liability. Currently, the unfunded liability is estimated at about $8.5 billion.

Rep. Mike Hawker , who proposed the plan, and other proponents say it could generate $60 million for the state this year. It calls for Alaska to sell up to $2 billion in bonds for its public employee fund and another $2 billion for its teacher fund.

Hawker says the state would likely pay less than 6% in interest on the borrowed money. In comparison, he says pension fund investments have returned 16% so far this year. Hawker, an accountant, says there is little risk of losing the money.

That assurance, however, did not convince Sen. Bert Stedman , co-chairman of the Senate Finance Committee , where the measure has been blocked. Stedman, who is a financial planner, says pension bonds may be an effective way to get the state out of its pension hole, but he favors a slower, more methodical approach.

Hawker says the measure, House Bill 13, was passed unanimously by the House and is widely backed outside the Legislature. Stedman said he expects to revisit the pension bond proposal next year, but Hawker warns the investment climate may not be so favorable by then.

There was unanimous stupidity in the Alaska House, but one cautious soul is blocking the deal. Hat’s off to Senator Bert Stedman for blocking the deal for now, but major points have to be subtracted for anyone who anytime thinks borrowing money at 6% to invest in securities is a good idea. Hawker, the accountant who says “there is little risk of losing the money” is clearly from another planet.

Mike Shedlock / Mish/