Always bet on Blankfein

(Fortune) -- If you want to know how Lloyd Blankfein is hanging in these days, you could read the SEC complaint against Goldman Sachs, which accuses his firm of fraud. You could watch the late night hosts tee off on yesterday's ten-hour Senate grilling of the Goldman CEO and his underlings. You could scan the emails released by that committee in which Goldman execs verbally cavort over the steal they think they are getting away with. But none of those is as coldly efficient as the mechanism Goldman Sachs itself uses to learn about and profit on the world around it: the markets.

British firm Intrade, which specializes in allowing ordinary people to place esoteric bets on world events, has just made a market, much the way Goldman does, to allow buyers and sellers to figure out how to price the likelihood that Lloyd Blankfein departs Goldman Sachs by the end of the year.

"A departure may include (but is not limited to) resignation, retirement, being fired, being demoted, or being assigned another position within the company. It does not include the appointment by Goldman Sachs of a co-CEO to work with Lloyd Blankfein," according to the rules of the security. It's worth nothing that the contract is null and void should Blankfein's demise be mortal and not professional.

Intrade has made a business out of letting markets serve as predictors of the likelihood of big events. Fortune last wrote about it when the firm, or rather, its customers, accurately gambled that a second attempt at the Wall Street bailout bill would pass in October 2008. The site doesn't just cover matters financial though; current markets include whether Elena Kagan will be sworn into the Supreme Court (just shy of 50/50) and whether the Republicans can take back the House in the midterm elections (trending upwards).

Can Goldman hedge a Blankfein exit?

Interestingly, the market gives Goldman Sachs (GS, Fortune 500) a chance to use its infamous proprietary trading department to hedge against the fallout of a Blankfein departure. If the traders bought as much of the market as possible, they'd be hedging their own potential stock drop were Blankfein to be banished. The purchase would serve as a hedge and could earn some young vice president like Fabrice Tourre millions of dollars if the market grows large enough. But of course, there is the question of propriety.

Goldman's current troubles stem from the fact that it seemed to understand the housing market's impending collapse and hedged against it without warning its customers to do the same. If Goldman invested in Intrade's market so that it would profit on Blankfein's departure as CEO, would the firm again be accused of trading on material knowledge that it should have disclosed to shareholders? It's the same argument plaintiffs are making against the firm in regards to the Wells Notice Goldman received last summer, but did not disclose.

Worse, if the proprietary trading desk accumulates a substantial position in Blankfein's departure and, over the course of the contract, he gains an even stronger grip on his job, would that spur the prop traders to try and engineer the departure of their own CEO, just to win their bet and avoid a loss? (Conspiracy theorists, fire up your blogs.) But remember, the contract is void in case of death, so any need for a new CEO has to be the result of an internal power play or a federal indictment, not a poisoned steak.

When we asked Intrade CEO John Delaney about the creation of the market, he cited a page of Goldman's website which read, "Our assets are our people, capital and reputation, and if any of these is ever diminished, the last is the most difficult to restore." It seems then, that if Goldman were to lose the services of Blankfein as CEO, it should act to shore up its capital assets, in order to begin the process of replenishing those of its reputation, and its people. After all, who has done a better job in that department than Goldman Sachs?

As of this posting, the market was slightly tilted towards Blankfein staying on board, with trading happening at $45, but it's been fluctuating quite a bit, as markets, after all, will do. The security is set to pay off $100 if Blankfein leaves, or $0 if he stays. We'll keep an eye on it between now and December 2010, when the contract expires.