because there is no losetup in the initrd.

What you need to do is to grab a copy of busybox and enable those features especially losetup and put it into /static of initrd. You may also use the standard losetup but make sure you also copy all those /lib/*/.so files over.

You also need to make the /dev/loop0 node

You also need to put loop.o in /modules

then you can modify the linuxrc to something like(replace the insmod cloop.o file=...)

insmode /modules/loop.0
losetup /dev/loop0 /wherever_your_uncompressed_image

and move on