Bernie Madoff is a real-life villain. A classic comic-book-based villain, except his power involved stealing money and buying lavish things for himself. Not exactly the kind of villain that would’ve kept Superman up at night.

And, yet, look at the damage he has inflicted: the Picower Foundation lost close to a billion dollars (its 2007 tax return valued its portfolio at $955 million) and the Carl and Ruth Shapiro Foundation of Boston claims it lost $145 million. A thief and liar, Madoff made at least a billion dollars in foundation money (many other foundations lost millions), and a total of $50 billion in investor savings, disappear. How?

It turns out that Madoff’s story of how he was able to perpetuate his Ponzi scheme may have unknowingly involved the foundations themselves, according to a recent Fortune article. In order to successfully orchestrate a Ponzi scheme, especially one capable of lasting decades, you need to sustain growth (withdrawals are placed with new funds) and maintain stability (find investors who don’t withdraw their cash). This way you can simply replace the “runoff” with new funds, and spend the “parked” cash on planes, houses, country club memberships, and a yacht named “Bull.”

Where can you find such content investors? Consider foundations.

Most foundations aggregate a pool of money; invest it (presumably diversifying their investments); and then sit back and watch the “miracle” of compounding unfold.

Now, Federal law says that all foundations must spend at least 5% of their funds each year on “good works and administrative costs” to preserve their preferential tax-status. In theory, foundations can spend more than 5%, but, in practice, they usually don’t.

Consider the Picower Foundation again. Picower had $955 million invested with Madoff, and let’s say withdrew 5% each year. The press reports that Madoff guaranteed his clients at least a 12% return per annum. Hence, Picower’s endowment, hypothetically, increased by $66,850,000 from 2007-08, even after the 5% payout.

That’s why a money manager like Madoff was so appealing to these foundations – they were operating like a bank: lending long-term at a high interest-rate (12%) and paying their customers (i.e. nonprofits) a lesser interest-rate (5%). These foundations were focused on earning net-interest income, which was the traditional banking model.

The question remains that had some of these foundations behaved less predictably than simply withdrawing 5% every year, would Madoff have been able to perpetuate his scheme for as long as he did? We’ll likely never know.

(The author would like to thank Chad Stacy, Director of Finance at Greater Pittsburgh Literacy Council (GPLC), for calling my attention to this article. Chad’s always a great source for information and advice. Thanks again, Chad.)