ANALYSIS: A distinct lack of detail in the measures unveiled yesterday unnerved the markets, writes Fiona Walsh

IF GORDON Brown looked rattled yesterday, he had every right to be. Just hours after unveiling the government’s second bailout of the British banking system in three months, shares went into freefall as the City of London’s shaky confidence in the sector all but evaporated.

Royal Bank of Scotland (RBS) crashed more than 70 per cent to just 10p at one stage as it rewrote the record books, warning that its losses for last year could reach £28 billion – the largest-ever loss in UK corporate history.

Lloyds Banking Group, formed from the rescue takeover of Halifax Bank of Scotland by Lloyds TSB, chose the wrong day to make its stock market debut, its shares plummeting by more than a third. And Barclays, which shed a quarter of its value on Friday, lost another 10 per cent in yesterday’s torrid trading session.

If the prime minister and his chancellor hoped their latest bailout proposals would reassure the market, they were clearly mistaken.

And the distinct lack of detail in the raft of measures unveiled yesterday did nothing to dispel the near-panic that has beset the sector since last year.

Last October’s bailout was designed to stop the banks going bust, but at the core of this latest support package is the urgent need to get the banks lending again, something the first bailout singularly failed to achieve.

At the heart of the new plan is a scheme to offer banks insurance against further losses on toxic loans, in return for a fee, with indemnity of up to 90 per cent available on certain specified debts. This, the government hopes, will boost confidence in the sector and encourage the banks to resume lending.

But no details were given of just how much this scheme might cost. While the prime minister angrily denied accusations that the government was giving the banks “a blank cheque”, he was unable to give any indication of the scale of the scheme, or its potential losses. And any losses will, of course, be borne by the taxpayer.

There is help for the moribund mortgage market, with a £100 billion plan to kick-start lending to homeowners. In a reversal of previous policy the state-owned Northern Rock, which had virtually pulled the plug on its mortgage business, is to resume lending after being given more time to repay its government loans.

The wide-ranging package of measures will also see the state up its stake in the troubled RBS group from 58 per cent to 70 per cent, after agreeing to swap its £5 billion of preference shares for ordinary shares.

This will free up more cash for RBS, which the government has made clear must flow back to personal and business customers in lending.

Many in the market believe it is only a matter of time before RBS is fully nationalised; certainly, if its performance continues to deteriorate at anything like the rate it has in recent months, full government ownership looks inevitable.

While the market is far from convinced that these measures will succeed, the cost of doing nothing, as Alistair Darling stressed yesterday, would be far, far greater. It would prolong and deepen the recession – a recession that will finally be declared official on Friday when fourth-quarter GDP figures are released.

Fiona Walsh writes for the Guardian in London