The only time I've seen this type of thing happen - all of the pages in a site are no longer indexed, yet PPC still works, is when something on the site has been set to no-index / no-follow.
If you had a manual penalty from Google, that would show up in Google Webmaster Tools. Plus, the site would still be indexed, just ranked really, really low. If everything was missing from Google's cache, then the most likely explanation is that it was set accidentally to no-index / no-follow.
This is a very easy thing to mess up, and it's possible that someone might have hit the wrong button by accident, or updated the robots.txt file.
In the past, I had a project manager who messed this up for a client while doing a content update on the site, and it was about a week before anyone noticed. She's no longer here (not due just to that issue). But this is so critical for me and my company that we've put an automated and human testing check in place each day:
For our company, we have an automated script that runs through all of our sites (and client's sites) each day to make sure that the site is set to index / follow, both on the pages and in the robot.txt file. We also check the title tag and make sure that the name servers haven't changed.
I also pay someone on my team to run through a 12 step checklist each and every day to make sure that things like the site search are working, contact forms go through properly, and that pages are set to index / follow.
I hope this helps...
Thanks,
-- Jeff