The nation is in a credit-induced mess. Thanks to incredible amounts of financial leveraging, a small-scale headache for the mortgage industry has ballooned into an economic catastrophe that threatens every global market.

Some of the nation’s largest, most secure banks are screaming for government help. But it is too late. The ripples created by over-leveraging, bad debt, and rising inflation are going to increase the problem exponentially, no matter what Bernanke or any other federal intervention can do.

In fact, for one large segment of the nation’s credit industry, Washington is tirelessly trying to pass legislation that would be a significant burden on future revenues. The credit card industry will be the next to stumble. Industry secret revealed Across the country, Americans owe more than $750 billion to companies like Visa and MasterCard. It is a scary figure, but it is not the one our nation’s elected officials are trying to eradicate.

Instead, Washington wants to uncover the secretive fees most consumers know nothing about. After all, these “interchange fees,” which are the fees credit card companies charge vendors for the ability to accept and process their cards, cost Americans (even those that pay with cash) more than $42 billion last year.

When you and I complain to our elected representatives, chances are, little action will be taken as a result of it. But when political and economic powerhouses like Wal-Mart and Target pick up the phone, Capitol Hill starts to move. That is why MasterCard shareholders and future Visa shareholders need to pay attention. If Washington (or should I say Wal-Mart and Target) gets its way, credit card industry revenues will be slashed.

Government regulation

In early March, the “Credit Card Fair Fee Act of 2008” was introduced to the House of Representatives. The bill works to limit the power of credit card companies in several ways. Investors need to be concerned with just one aspect of the potential legislation.

If passed, vendors like Wal-Mart and Target would have the ability to negotiate their interchange fees. It could save them tens of millions of dollars every year. Currently, when a customer swipes his card to pay his bill, the retailer is forced to pay as much as six percent of the total bill to the credit card company. Because a store cannot legally charge customers paying with credit cards any more than a cash-paying customer, it is a fee that quickly tacks on millions of dollars to the prices of all goods. Even if you pay your credit card on time every month, you are still paying for the convenience of that card.

That won’t last much longer. There is a very good possibility this legislation could be introduced into law within just a few months. It would be a devastating blow to credit card companies and their investors.

MasterCard’s annual revenues could plunge by up to $250 million, while its earnings could be slashed by 25%. If forced to negotiate its Interchange fees, Visa’s revenues would drop by over $550 million, and its earnings would be slashed by a third.

A rare opportunity to strike back

For current MasterCard investors, this legislation is an indication that it is time to unload their holdings and get out while they can. The ride is over. Since the company went public in 2006, share price has soared by more than 400%. Few investors will have to wipe any tears, unless they are tears of joy.

While investors looking for share price to continue to rise are out of luck, short investors and options traders have a fantastic opportunity. Combine the very real threat of a tightly contracting economy with the currently pending legislation and you have a recipe for an intense share price decline.

It is a short sellers dream come true. If earnings are expected to plummet by as much as 25% simply because of this legislation, imagine the compounding effect of greatly reduced consumer spending. There is no reason to believe MasterCard’s share price could not drop by $50 to $100.

When it does, smart investors will be cashing in. In a situation like this, put options are a fantastic tool. Right now, the January 2009 puts should be getting your attention. Time decay will not be a major factor and the seven-month window gives share price a lot of time to make a significant downturn, even if Congress drags its feet.

The puts with a 160-strike price (ZUEML.X) are highly attractive and contain only moderate risk. Share price is already starting to rise, so do not hesitant to move. The market outlook may look bleak, but if you know where to look, use what tools you have, and invest wisely, profits are not hard to find. As long as the markets are moving, you will make money.

Capitol Hill is about to hand us a profit-rich gift. Take this rare opportunity and run with it. I am sure your congressman already has.

Andrew Snyder
Today’s Financial News