Politicians rival bankers for ineptitude. In the matter of Sir Fred Goodwin, the former chief executive of Royal Bank of Scotland who has walked away from the largest corporate loss in British history with a pension for life of £650,000-a-year at the age of 50, the Chancellor of the Exchequer, Alistair Darling yesterday had this to say: "It was only very recently that we became aware that the decision of the previous board of RBS to allow Sir Fred to take early retirement had the effect of increasing his pension entitlement." For "recently", read "last week".

Think about this for a moment. The Government rescued the bank some months ago in return for a 70 per cent stake in the share capital. It has since been in constant talks with the senior management about providing further support.

The Government has been able to discover whatever it has wished to know. It is aware, too, that public anger about the high rewards for failure is rising. Ministers express the same sentiments in public. And even if the Government had quite forgotten about Sir Fred, his widely publicised appearance in front the Treasury Select Committee recently to offer some kind of apology should have jolted the memory. The Chancellor also realises that many ordinary employees of RBS will shortly be made redundant. The "Fred-the Shred" news is hard for them to take, isn't it?

Then there is the question of due diligence. When one company takes over another, let alone when Her Majesty's Government takes over a very large bank, it is a pro forma action to acquaint oneself with the details of the directors' remuneration and of any recent pay-offs for the reason that you may need to take legal action against them. And yet, in the light of all this, the Chancellor didn't once enquire what exactly were Sir Fred's severance terms? It beggars belief.

This same ministerial incompetence pervades everything. It has been present since the beginning of the financial crisis. Think RBS and you also think Northern Rock. The stories are essentially similar. In the case of Northern Rock, the Government had no alternative but to intervene to safeguard depositors' funds. Seeing that Northern Rock was bust, the Government should have immediately taken it into public control so that taxpayers, who now shouldered all the risk, would fully benefit from any recovery. The Government tried to resist this obvious course of action for months until finally it had no alternative but to go ahead and nationalise.

It looks likely that RBS will have to go through the same prolonged agony. For the failure to check Sir Fred's greed is the least of the Government's mistakes in its handling of RBS's insolvency. Much worse are the concessions announced yesterday. They put taxpayers at enormous risk without sufficient reward.

The Government is to insure £325bn of the bank's toxic assets against further losses. In return for what? The bank will bear the first £19.5bn of any losses (6 per cent) and in return for taxpayers covering 90 per cent of any further looses, a £6.5bn premium (2 per cent) will be payable.

To see how generous this is, translate it into everyday terms. You have made some bad investments and you could lose up to £1,000. The Government says – you take the first £60 of any losses and pay me £20 to insure 90 per cent of the rest. This is fantastically generous. What a bargain! For a premium of £20, you have dumped up to £847 of potential looses into the Government's lap. And its gets better – for RBS, that is. The bank doesn't even need to pay the premium in cash. It can use promissory notes instead.

No wonder RBS shares rose 24 per cent to about 29 pence on the news. See the words of a Credit Suisse analyst who said: "This is undoubtedly extremely helpful for RBS shareholders". This is not what I want to hear. As a taxpayer I wish to receive all the benefit, if benefit there will be, for rescuing a large insolvent institution. I don't relish being exposed to a series of surprises such as the Sir Fred heads-I-win-tails-you-lose enrichment scheme.

While it remains nominally in private ownership, RBS will be run on the footing of doing the best for shareholders (as must be the case with such a structure) while checking that the Government doesn't object to a particular course of action. Instead there should be a focus on taxpayers' interests. We are patient, we know it will be a long haul, but we want a full return.

a.whittamsmith@independent.co.uk