Feb. 19 (Bloomberg) -- Egan-Jones Ratings Co., the research firm that in 2006 warned clients of a General Motors Corp. bankruptcy, is expanding coverage of asset-backed securities as investors and regulators seek alternatives to Standard & Poor’s and Moody’s Investors Service.

Since it was founded in 1995, Egan-Jones has primarily provided credit ratings on companies, and is increasing its coverage of mortgage securities, said Sean Egan, president of the company, in an interview. The Haverford, Pennsylvania-based firm, which currently has about 20 employees, plans to hire an analyst every other month for the next two to three years, he said.

“The market is demanding it,” said Egan, 51, a graduate of Harvard University Business School who previously spent about 15 years in banking. “There’s been a basic breakdown in trust.”

S&P, Moody’s and Fitch Ratings, the world’s largest credit- rating companies, have been criticized by U.S. lawmakers, the Securities and Exchange Commission and the European Union for ignoring conflicts of interest and risks that helped spur the worst financial crisis since the Great Depression. Unlike its bigger rivals, Egan-Jones doesn’t receive payments from the companies it covers, relying solely on research sold to clients, including hedge funds and investment banks.

At a congressional hearing in October on the credit-ratings companies, Egan testified that the financial crisis was in part the result of “grossly inflated, unsound and possibly fraudulent ratings” on asset-backed securities and companies that dealt in them. Companies were paid to rate the securities as well as to provide consulting services and advise issuers on how to structure bonds to achieve the highest ratings, he said.

Ahead of Rivals

Egan-Jones covers more than 1,250 companies and was ahead of other ratings firms in warning investors about Bear Stearns Cos., Lehman Brothers Holdings Inc. and American International Group Inc., all of which either collapsed or were rescued last year. In April 2006, the firm said that GM’s declining cash was pushing the company toward bankruptcy. The carmaker needed a $13.4 billion bailout last year to stay afloat.

In June, when MBIA Inc. was rated A- by S&P, Egan-Jones lowered the bond insurer to C, or 11 levels below investment grade, and said the company’s “future is doubtful.” MBIA said yesterday that it will split its municipal bond-insurance business from mortgage-related debt guarantees. S&P subsequently lowered its rating.

Egan said his firm’s expansion in structured finance will be focused on residential mortgages and, based on customer requests, can include research of other areas like credit-card securities.

Co-founder Bruce Jones worked at Moody’s from 1980 to 1993 and before that spent 19 years as a security analyst.

To contact the reporter on this story: Ari Levy in San Francisco at alevy5@bloomberg.net.

Last Updated: February 19, 2009 14:51 EST