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California becomes the third state to go after the big three credit rating agencies. New York and Connecticut are the other two.
Jerry Brown's argument will be this: they violated specifically California law which prohibits unfair and deceptive business practices.
There have been 1.2 million foreclosures in California since December 2007. The state's attorney general says the credit rating agencies are partly to blame.
"These agencies gave their seal of approval, the highest rating to underlining securities that were highly dangerous and in fact wreaked havoc on the lives of millions of people," said California Attorney General Jerry Brown.
The agencies are Moody's, Standard and Poor's and Fitch.
They operate by researching and analyzing the debt of public and private companies, and then they rate that debt – triple 'A' is the highest rating. Banks, investors, pension funds and brokers use this information.
"Investors rely on this information to make decisions about whether to invest in it. Many big investors, pension funds, for example, cannot buy debt that is not triple 'A' rated or double 'A' rated," said Marketwatch Editor-in-Chief David Callaway.
One of those was the California Public Employees' Retirement System, CalPERS, which bought some toxic investments even though they had a triple 'A' rating. They are now suing the agencies after suffering one billion in investment losses.
How did these agencies like Standard and Poor's get it so wrong? Or did they?
Market watchers say investment banks knew how to package risky mortgage loans with the solid ones.
"The way they would do that would be they'd present the security and S&P would come back and say "Well, we don't think this is going to be triple A," and then they would go away and they would register it a bit and put maybe a little more money in the pot, more cash in the pot, they'd come back to S&P and say "What do you think now?" They'd say, "Well you're getting there," said Alistair Barr.
"It looks like they just made lots of money, had their conflict of interest and went happily to the bank leaving all the rest of us to hold the bag," said Brown.
Brown's office issued subpoenas On Thursday.
David Wargin of Standard and Poor's said: "We have yet to receive a subpoena, so we cannot comment at this time."
These are only subpoenas, to see if they did anything wrong. If Brown's office finds they did, then we'll likely see a lawsuit.
This is not the first time Standard and Poor's has gotten it wrong. It failed to predict the bankruptcy of all the largest banks in Iceland nearly a year ago.
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