The famed deal maker told a gathering of reporters and industry executives sponsored by The Wall Street Journal that, in recent years, broker-dealers had increased their leverage, or total assets relative to equity, to excessive levels.

Equally damaging, the methods banks had used to monitor their risk-taking during the boom years were shown to be inadequate when markets turned last summer. Reliance on metrics such as value-at-risk pushed aside common sense.

"Obviously, when you have a runaway increase in volume in transaction volumes of securities and liabilities and you leverage the equity at that sort of rate, you dramatically increase the risk," Wasserstein said.

The Lazard chief, in a rare public appearance, was in good humor as he tossed barbs at a number of Wall Street players. For example the Ph.Ds that populate Wall Street firms and dominate risk management, "have proven to be worthless, if not harmful," he said with a laugh.

He also took aim at the large broker-dealers that won valuable access to Federal Reserve funding after the Bear Stearns collapsed in March.

"This is a give-away from taxpayers," he said, and should only be granted in exchange for tighter regulatory control.

Wasserstein said much of the blame rests with credit rating agencies, which used similar methods to rate mortgage securities and corporate bonds.

"It's like comparing a grape to a grapefruit," he said, concluding that the rating agencies "need a lot of work."

Alluding to rating agency Standard & Poor's, which earlier this week downgraded large investment banks amid concerns about leverage, Wasserstein said: "It's funny the rating agencies got around to thinking about this issue yesterday."

Government regulators presided over a dramatic increase in leverage levels and Wall Streets expansion in new businesses such as securitized loans.

"There was a new era of financial markets," he said. "They became global, they became technical and they became interdependent. However, the genie got out of the bottle and was completely uncontrolled in a common sense way."

Problem was, the old ways of measuring risk did not keep pace with changes in the global financial markets. Recalling how commercial bank Citicorp in the 1990s was deemed "too big to fail," Wasserstein said markets are now widely connected by counterparty exposure.

"Now even small firms are too important to fail," he said, as illustrated by the response to Bear Stearns' collapse.

Wasserstein said Wall Street banks have to find a new business model, one that is not reliant on "infinite capital" to support extreme leverage.

Small U.S. banks, he noted, are due for a wave of consolidation since they too can no longer make a living piling up debt against thin interest spreads.

Even so, Wasserstein said he is confident Wall Street banks will adapt to the changes and markets will recover.

"This is a bubble, and we're at the point where the bubble burst relatively early and that's a good thing," he said. "In my view ... the system had gotten to excess, fairly predictable excess and it's calmed down and we'll all be the better for it."

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