Huh. None of us played a single character long enough for this to work... Well, maybe our HackMaster group (though most of us went through at least two in 11 years, and I think I tied with two other players for most lost at five).
But a good dungeon master should NEVER be the villain - yes, an antagonist, making situations worse (or, better yet, giving cryptic clues that the players misinterpret to make matters worse...) but never be the real enemy, just, more of an anti-hero, kind of like the title character on Doctor Who was for his first few stories.
Dirt League and Zombie Orpheus Entertainment/Dead Gentlemen Productions have toyed with variations of this idea (including one where the PCs find themselves playing characters in the real world - one of the funniest parts was when a character gets hurt, then the camera pans away to another character making a dire prediction, and then looking shocked. Camera pans back to the first character, who pulls out his sheet - "I'm no longer injured. I'm Canadian so have free healthcare.")