> As I understand it, RAW has to be converted into a bitmap image using a camera specific algorithm, so before he's even started compressing it the data has been munged, the data is then compressed and output as a completely different file format

That depends if you are talking to photographer or photoshop user :)

This is what Photoshops open dialog looks like:

http://i.imgur.com/hUgPckj.png

If you open file as "Camera RAW" then it indeed goes through photographic processing (debayering etc), but if you use "Photoshop RAW" then the opening is essentially lossless.