NEW YORK (Reuters) - The U.S. government’s $700 billion bailout fund is unlikely to be enough, with the financial system needing more than $1 trillion to get through the crisis, two of Wall Street’s top dealmakers said on Wednesday.

The global crisis appears to have passed its most intense phase, seen around the time of the collapse of Lehman Brothers Holdings Inc LEHMQ.PK in September, but financial institutions still face losses in the fourth quarter and early next year as the economy and credit quality deteriorate, said Gary Parr, deputy chairman of investment bank Lazard Ltd LAZ.N.

Parr was speaking on a panel along with H. Rodgin Cohen, chairman of law firm Sullivan & Cromwell, at The Deal’s M&A Outlook 2009 conference in New York.

“You saw the problems of the financial services industry start to play over into the broader economy,” Cohen said. “Now, we are going to see the reverse trend, with the broader problems in the broader economy moving back into the financial services industry.”

Parr said the financial system had run out of a cushion to deal with further losses.

“The government’s $700 (billion) is not enough. It’s going to be over a trillion,” he said. “It has to come from somewhere. And indeed in the last three months around the world, the primary source of capital for the financial services industry was the government.”

Cohen added that private equity could be another potential source of capital -- although relatively smaller -- for the sector, but an unwillingness to change the approach to letting that happen had held buyout shops back.

“It is a source of frustration to a number of people, including me, that we can’t get it right so that private equity can really be a major investor in financial services companies, particularly depositories,” Cohen said.

The U.S. Federal Reserve recently relaxed bank ownership rules but private equity executives have said it did not go far enough.

Parr and Cohen, both veteran dealmakers in the financial sector, were involved in several major financial institutions deals during the crisis -- including the sale of Bear Stearns to JPMorgan Chase & Co JPM.N and Mitsubishi UFJ Financial Group Inc's 8306.T investment in Morgan Stanley MS.N.

Cohen said that among the developments of the last few months, the failure of Lehman was “of all the events, probably the single most significant.”

“This was the first time all creditors were going to be at risk in any financial services company,” Cohen said.

FIGHT ANOTHER DAY

Parr said, “We may have crossed the inflection point of the most intense crisis.” But he warned of more losses to come.

“Inevitably there will be losses in the financial services sector for the next couple of quarters,” he said.

Cohen said the crisis was likely to lead toward a single regulator, as there is an effort to ensure financial institutions that compete with regulated entities are also regulated.

The U.S. Federal Reserve is that logical regulator, he said.

Over the coming months, the priority of financial institutions should be to start working through some issues, such as finding ways of funding, recapitalization and strengthening balance sheets, Parr said.

“I frankly don’t think strategic positioning is the priority for major financial institutions,” Parr said. “The priority of the next 12-18 months is to live to fight another day.”